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Last Week in Review: Powell Showers the Bond Market with Love

This past week long-term interest rates spiked higher in response to a hotter-than-expected consumer inflation print only to come back down in response to soothing words from Federal Reserve Chairman Jerome Powell. Let us break down what happened and what to look for in the weeks ahead.
Consumer Prices Are Rising
The Consumer Price Index (CPI) for June showed inflation rising by 5.4% year-over-year, much hotter than expectations and the highest reading since 2008. Inflation is the arch-enemy to bonds and interest rates, so it was no surprise to see long-term Treasury and home loan rates spike higher.
This high reading came one day before Fed Chair Powell was set to speak in front of Congress in his semi-annual testimony on economic conditions and monetary policy.
Heading into the testimony, there was already growing pressure for the Fed to start tapering bond purchases, more specifically MBS purchases, because of inflation fears and froth in the housing market.
Before Mr. Powell took a seat in front of Congress, his prepared speech was released, and he made it very clear the Fed is not going to taper bond purchases just yet despite the higher inflation fears.
There Is Still a Long Way to Go
The Fed has a dual mandate of maintaining price stability (inflation) and to promote maximum employment. They are leaning on the employment side of the mandate when they are saying, There is still a long way to go. With over 9M job openings, the most ever in U.S. history, the Fed is correct. It will take some time to fill millions of jobs.
Mr. Powell also said the Fed is going to talk about tapering in the next couple of meetings. They meet again on July 27th and 28th with the next one in late September. This means the Fed is likely to hold the current course throughout the summer.
Bottom line: Interest rates are at the best levels seen since mid-February, making it a great opportunity to secure a home loan. For anyone considering a mortgage, now is the time.

Last Week in Review: Less Equals More for Rates

This past week long-term interest rates fell to their lowest levels since mid-February. Let us go through some reasons why rates declined and what it means for the second half of 2021.
From More to Less
The great reopening of the U.S. economy appears to be fizzling. There are still 9.3M open jobs available, which means the labor market is improving, but slowly. The effect of fewer employed means there will be softening economic growth and lower inflation. Bonds love low inflation, and seeing the 10-year note yield hit 1.25% this past week suggests that higher inflation will indeed be transitory.
Another thing we are getting less of is policy response, both from Congress and the Fed. On the former, the original proposal from the White House was another $4 trillion in economic stimulus through the American Infrastructure Plan and American Families Plan. Those proposals are being batted around Congress and will likely end up being a fraction of the original proposal.
On the latter, the Federal Reserve, who has been so accommodative during COVID, will be less so going forward. At the recent Fed meeting, they changed their forecast from initially hiking rates in 2024 to hiking as many as three times in 2023.
And on the bond-buying program, where the Fed has been purchasing at least $40 billion worth of mortgage bonds each month, they will be doing less in the future, and the pressure is on to start tapering. At the last Fed meeting, some Fed members cited a scorching hot housing market as a reason to stop buying mortgage-backed securities.
Return of Familiar Tailwinds
US bond yields are relatively attractive compared to other large bond markets around the globe like Germany and Japan where their 10-year yields are -0.31% and 0.02%, respectively. This helps the U.S. attract investments from around the globe, thereby pushing yields lower.
Bottom line: Markets tend to overshoot to both the upside and downside, meaning this revisit to rates in February could be fleeting. For anyone considering a mortgage, now is the time.

Last Week in Review: Powell Soothes the Markets

This past week home loan rates improved slightly as Fed Chair Jerome Powell was on Capitol Hill sharing the Fed's midyear economic outlook. Let us break down what the Fed Chair said, since his words also pushed stocks higher with the NASDAQ reaching all-time highs.
"Long Way to Go on U.S. Economic Recovery"
The Fed could not be clearer than with this line. IF the economy has a long way to go to recovery, THEN the Fed will not be hiking rates anytime soon and will also not likely taper bond purchases in the near future.
Recent economic readings have shown some signs of weakness and a recent report showed over 9 million job openings. The Fed has a dual mandate of maintaining price stability (inflation) and promoting maximum employment. On the latter mandate, the economy is coming up short, and this gives the Fed cover to not raise rates.
"I Have a Level of Confidence in the Prediction of Transitory Inflation."
The financial markets appear to agree with the Fed. The 10-year note yield at 1.48% is certainly not worried about inflation right now. We will not find out if higher inflation is transitory until later in the year, or even next year, and Powell reiterated this by saying, "It may take some patience to see what is really happening," or as Axl Rose sang, "All we need is just a little patience."
On the inflation front, we all must hope the Fed is correct about high inflation being temporary. Persistent and high inflation is devastating to an economy. Outside of supply chain bottlenecks, which have caused high prices in items and appear to be somewhat temporary, there are components of inflation that appear to be "sticky" and less temporary, like wages and housing. We shall find out if the Fed will get it right. Powell did say it's, "Very, very unlikely the U.S. will suffer 1970's type inflation." For the moment, bond markets and rates seem to agree.
"Optimism About the Path of the Economy and Strong Job Creation"
Recent job creation numbers have been reported beneath expectations, which again gives the Fed reason to hold rates near zero while continuing to purchase bonds.
Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed bond-buying program. This program is now in jeopardy, should economic data come in stronger or hotter than expected. 

Last Week in Review: The Fed Prepares the Markets for Liftoff

This past week the Federal Reserve had their June meeting and prepared the markets for liftoff, meaning when they would hike rates in the future. The initial bond market reaction was negative with both home loan rates and long-term Treasury rates moving higher. Let us break it all down and discuss what to look for in the weeks and months ahead.
The "Talking About, Talking About" Meeting
At the previous Fed meeting in April, the Fed had been forecasting the next rate hike to the Fed Funds Rate would be in 2024. On Wednesday, June 16, the Fed pulled forward those projections and are now seeing the likelihood of the next rate hike in March 2023 followed by as many as two more hikes in 2023.
What Happened?
The Fed acknowledged that inflation may run hotter and be more persistent than originally expected. This is the reason why the Fed may have to hike rates sooner than previously forecasted. While a Fed rate hike has no direct effect on home loan rates, this announcement does influence mortgage rates going forward, but how?
The Fed will have to start tapering bond purchases well in advance of a Fed Funds Rate hike. This means they will slow their bond purchasing program sooner than previously envisioned, which will likely lead to higher mortgage rates sooner than expected. Fed Chair Jerome Powell said the Fed members at the meeting did talk about the notion of tapering. This means the "we are not even thinking about, thinking about" tapering line has been discarded. The Fed is no longer thinking, but discussing, rate hikes and less bond buying.
In trying to calm the markets, more specifically stocks, the Fed did clearly state that any rate hike or change to the bond-buying program will be based on the incoming data in the months ahead. So, while the Fed is preparing the markets for quicker and more rate hikes, it may not happen as soon as March 2023, which, by the way, is still a long time from now.
Moreover, for this to happen, the incoming economic data over the next several months must support the Fed move. This means we must pay close attention to the labor market, economic growth, and inflation readings. If they run hot later this year, we should expect the Fed to come out and say they are about to begin tapering their bond purchases.
Las Wednesday's Fed announcement caused a knee-jerk reaction of lower bond prices, but Thursday we watched prices stabilize, and the 10-year note yield is still hovering at 1.46%, a multi-month low.
Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed bond-buying program. This bond-buying program is now in jeopardy should economic data come in stronger or hotter than expected. If you are considering a refinance or purchase, home loan rates may not improve much or at all from here. Now is a great time to lock.

Last Week in Review: Inflation, Fed, and the Wall

This past week, home loan rates were improving slightly week-over-week until their arch-nemesis, inflation, reared its head. Let us break it all down and talk about what it means for you and your clients.
Consumer Inflation and Looking Ahead
On Thursday, the May Consumer Price Index (CPI) showed that consumer inflation rose by 5.0% year-over-year, and after removing the effects of food and energy, the year-over-year rate of inflation was 3.8%.
While the headline showed that 5.00% inflation might be alarming, the bond market's reaction was a bit restrained. Normally, high inflation numbers would apply heavy selling pressure on bond prices, causing rates to rise. That did not happen. Why?
The bond market is forward-looking. The financial markets were expecting a "hot" inflation reading and have sided with the Fed who continues to say higher inflation over the coming months will be "transitory," or short-term, in nature. Future readings of CPI will be important to follow to see if the high inflation readings do cool down. If they do, rates will remain low and could continue to improve; the opposite is also true.
9.3M Reasons Why the Fed Won't Taper
The Federal Reserve, our central bank, has a dual mandate: maintain price stability (manage inflation/deflation) and promote maximum employment. On the latter, the economy is coming up short on the job creation front. The last two jobs reports came in well beneath expectations, and a recent report shows there are 9.3M jobs available in the economy: a record-high figure. So, we have a lot of work to do to get to maximum employment. If that is the case, it is highly unlikely the Fed will taper their monthly bond purchases anytime soon. The Fed has said they need to see "substantial improvement" toward their dual mandate before tapering. What does that mean for you and your clients? It means that long-term rates are likely to remain lower for a longer time.
Be sure to read the chart section below as we discuss the wall, which has limited rate improvement.
Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed bond-buying program. The Fed will continue to buy bonds and keep rates relatively low for quite a bit longer, but if inflation ticks up in the months ahead, we should expect rates to tick up too.

Last Week in Review: Real Rates and When the Music Stops

This past week, home loan rates ticked up slightly but remain near three-month lows. Despite historically low rates, mortgage applications ticked down for the second consecutive week as tight inventory and rapidly rising home prices weighed on purchase activity.
Opportunity Is Knocking
Mortgage and housing professionals should be telling their clients and sphere of influence that if they are looking to either refinance or purchase, the time is now.
Home loan rates are literally being pinned down by the Federal Reserve, which is purchasing $120B worth of Treasurys and mortgage bonds every month. If the Fed were not purchasing these bonds, home loan rates would be much higher.
How do we know? Look at real rates, or the value of the 10-year note yield after the effects of inflation. At the moment, the 10-year yield is near 1.60%, and inflation expectations for the next ten years are 2.45%. If you subtract the 2.45% from 1.60%, you get -.85%. So, we currently have negative real rates, meaning investors buying the 10-year note are losing -.85% a year. That is unsustainable over the long term. Who in their right mind would purchase the 10-year note as an investment just to lose money every year? Yes, the Fed.
The Federal Reserve has made it clear that they are not "even thinking about, thinking about" tapering their bond purchases.
What Happens When the Music Stops?
A look at history shows the last time the Fed was engaged in bond buying, or quantitative easing, was back in 2013, and this was the last time real rates were negative. In May 2013, the Fed simply stated that they could "taper" purchases in the future, and rates immediately shot up with the 10-year yield going from 1.60% to over 3.00% in just a few months. This caused a major spike in mortgage rates.
The Fed Conundrum
Despite heightened inflation fears and calls to taper bond purchases, the Fed continues to say, "Now is not the time." There may also be pressure from the Treasury Department to keep long-term rates low as the country embarks on an enormous stimulus and spending spree. It could be quite detrimental for long-term rates to tick up as our debt expense would be massive.
Over the next few months, watch inflation. If readings come in hotter on a month-over-month basis, we could see upward pressure on rates, like we did between January and March of this year.
And remember, the uptick in rates happened despite the Fed bond buying, which is a testament to their inability to keep long-term rates pinned down if inflation is a problem.
Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed. The Fed will continue to buy bonds and keep rates relatively low for quite a bit longer, but if inflation ticks up, we should expect rates to tick up too.

Last Week in Review: What Goes Up Must Come Down

This past week home loan rates held steady despite enormous volatility in the financial markets. Let's break down what happened and look at what to watch for in the week ahead.
Wacky Wednesday
A "risk-off" trade is when investors sell risky assets like stocks and then park the money in safer investments like bonds and gold. This past Wednesday was one of those odd times when virtually everything went lower in price: stocks, bonds, commodities, US dollars, and cryptocurrencies.
On the latter, cryptocurrencies fell sharply on word China will not embrace Bitcoin for transactions. This "risk-off" selloff seeped into stocks, which fell sharply, and even bonds were not immune to the price decline.
When Buying Demand Doesn't Meet Selling Demand
Every week the U.S. Treasury sells bills, notes, and bonds to help fund the government. Now with the many different stimulus packages and more on the way, the Treasury is pressured to sell an enormous and ever-growing amount of debt into the bond market.
On Wednesday, the Treasury peddled $27B in 20-yr notes. The buying demand was weak, and as a result, Treasury yields ticked up a touch.
Why is this important to follow? If the Treasury auctions are unable to attract buying demand, rates will be pressured higher to attract investors, and the Fed will be pressured to do more. Remember, the Fed is buying more than $80B of Treasurys every month to help keep long-term rates low.
Timberrrrrrrrrr!
Quick price check on Lumber. It sits near $1300, down nearly $400 in the past week or so. If there is a price we want to see decline, it's lumber.
One Thing We Want to See Go Down: Prices
A big fear and uncertainty in the financial markets is inflation. The Fed continues to believe that higher inflation in the months ahead will be "transitory" or short-term in nature.
Prices are rising year-over-year because of big changes in oil and food, and those should simmer down in the months ahead. However we did see some sizable month-over-month increases in prices. Hopefully, those will simmer down as well later this year.
For the moment, the 10-yr note yield sits near 1.65% which suggests the bond market is not yet worried about inflation.
The Fed Support Will Continue
The minutes from the previous Fed meeting were also delivered on Wednesday and sparked incredible volatility. At the end of the day, this may be the most important line of the minutes:
"In their discussion of the Federal Reserve's asset purchases, various participants noted that it would likely be some time until the economy had made substantial further progress toward the Committee's maximum-employment and price-stability goals."
Finally, the Fed is not going to stop purchasing bonds anytime soon, which means long-term rates will remain relatively low for a bit longer.
Bottom line: This is no time to get complacent, and while interest rates may not move too high in the near future, they may also not improve much from here as evidenced by what happened this week. Take advantage of what is available today thanks to the Fed bond purchasing program.

Last Week in Review: The Price is Wrong

This past week, the yield on the 10-year note increased to its highest level in one month in response to a very hot consumer inflation reading. Let us break down what happened and get into what to look for in the week ahead.
Last Wednesday, the financial markets were prepared for a high Consumer Price Index (CPI) inflation reading. Well, the report showed headline consumer prices climbed 4.2% year-over-year, far above the 3.6% expected and the Core CPI (which strips out food and energy) rose by 3.0% year-over-year, the largest 12-month increase in 26 years.
The market reaction was a swift decline in both stock and bond prices with yields moving higher. If inflation rises, rates/yields must rise to compensate the investor for the effects of inflation.
Some bad history was made with this spike in inflation. For the first time in nearly 50 years, CPI has exceeded mortgage rates on a year-over-year basis. This screams opportunity for those looking to refinance or purchase a home, because at some point either inflation must come back down, rates must go up, or some combination of both.
Will Price Increases Be "Transitory?"
That is the biggest question for the economy and financial markets. The Federal Reserve fully believes that the spike in prices will be temporary, and we should see a moderation in prices come fall. So we will have to wait to see if the Fed is correct. What we can expect over the summer months is more volatility in stocks, bonds, and rates, as future inflation readings will be closely watched for sustained and substantial price increases.
"Don't Fight the Fed"
We should all remember that saying. The Fed continues to hold the Fed Funds Rate near zero and purchase bonds to keep long-term rates low. The muted outlook for inflation supports their stance.
If the Fed is right and inflation does moderate in the fall, we will not see any major increase in rates. If the Fed is wrong and we see sustained higher inflation, the Fed will likely adopt other tools to help keep long-term rates low. Again, likely no major increase in rates.
If that sounds a bit like a win-win from a rate perspective, yes, it is. We should expect rates to remain relatively low for a longer timeframe.
Bottom line: This is no time to get complacent, and while interest rates may not move too high in the near future, they may also not improve much from here, as evidenced by what happened last week. Take advantage of what is available today thanks to the Fed bond purchasing program.

Last Week in Review: Yellen for Higher Rates

We watched long-term rates, like mortgages, improve slightly this past week despite a surprising comment from Treasury Secretary Janet Yellen. Let's break it all down and look at what's on tap for next week.
"It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat" - Treasury Secretary, Janet Yellen
Janet Yellen was being interviewed on Zoom when she unleashed this seemingly innocent and likely honest comment. Well, it sent shockwaves across the stock market, pushing the NASDAQ down as much as 400 points last Tuesday alone.
Yellen was once the Fed Chair, and in that former role, it would be her duty to share comments on monetary policy. As Treasury Secretary, it is not her role to discuss rates. Especially, considering the active Fed Chair Jerome Powell saying over and over just days earlier at the Fed Meeting that "now is not the time" to raise rates.
There is big pressure on the Fed to help keep rates low. First and foremost are the upcoming "Plans" being debated in Washington D.C. The American Jobs Plan and American Family Plan are estimated to cost another $4 trillion, on top of the $1 trillion-plus still not spent from the American Rescue Plan. All this spending must be paid for by selling new bonds in the market. What we as a country can't afford now is higher rates as the expense to service all this new debt will be an enormous burden.
Sell in May and Go Away
Stocks, especially the tech-laden NASDAQ, may have used Yellen's comment as a reason to sell – but some of the downward pressure in stocks may be a seasonal phenomenon called "Sell in May and Go Away". The idea is that stocks generally underperform during the summer months when many take vacations, thereby creating lower trading volume, larger price swings, and more risk.
As you could imagine, the pain in stocks was a gain for bonds. The 10-year yield declined to 1.56%, down nicely from 1.75% from just a few weeks ago.
If the summer selloff in stocks continues, we may see further improvement in rates.
Opportunity knocks again
With the recent improvement in rates, many more people can still benefit from a refinance and it will certainly help drive the purchase market. However – any rate improvement could be short-lived – here's three reasons why locking at today's rates may make sense:

1. Treasury Secretary Janey Yellen's comments for higher rates was honest. Lumber and other commodity prices are soaring – higher rates would cool that off.
2. There is growing pressure on Fed Chair Powell to start "tapering" bond purchases. Again, in response to "frothy" assets like stocks and real estate.
3. We are going to see higher inflation numbers over the next few weeks – what we don't know is how high the numbers will be or how bonds will react. Bonds do not like inflation – it's like kryptonite to Superman...a killer.

Bottom line: Rates have improved of late, but the good times may be relatively short-lived. Those thinking about locking in today's rates should do so.

Last Week in Review: No News is Good News

In the absence of any meaningful economic reports this past week, we watched bond prices rise while rates inched lower. Oh yeah!!!
Let us break down what is going on and look into this week as the boredom ends.
The Path of Least Resistance
Rates have been steadily improving over the past few weeks as consumer inflation fears have waned. With a nice trend in place and no news to knock bonds down, prices continued their path of least resistance: higher. How high? Mortgage-backed securities, which are where home loan rates are derived, closed at their highest level since March 2nd this past week, and the 10-year yield hovered near 1.55%, also the lowest in nearly two months.
FOMC Blackout Period
The Federal Open Market Committee (FOMC), which meets eight times per year to discuss economic conditions and determine whether to hike or lower the Fed Fund Rates, can always move the market when they speak or during interviews.
However, the FOMC has established a blackout period where FOMC members are to limit their public speaking and interviews. The current period is April 17 through 29th. When Fed members are not talking or sharing their views, the markets can't react to any perceived positive or negative statements. The quiet ends next week when the Fed delivers their Monetary Policy Statement on Wednesday at 2:00 p.m. ET. More on that below.
Bonds Regaining Some Shine
A couple of interesting trends happened this week which could bode well for rates in the near-to-intermediate term. First, stocks struggled a bit this past week, and when they dropped, rates also declined. This is a typical market reaction, but something we have not seen much of this year during the steady increase in rates. If stocks continue to stumble and we see a seasonal, "Sell in May and go away," reaction, it could leave room for further rate improvement.
Second, the 20-year bond auction this past week was well received. This means the buying appetite for Treasury securities was very good despite the recent improvement in rates/yields. If this trend continues, it will help keep long-term rates relatively low.
Housing en Fuego
March existing-home sales showed the median price rose by an annual record-breaking pace of 17.2%. This scorching rise is due mainly to an anemic 2.1 months of available inventory for sale.
Homes sold in 18 days on average, another record low.
This is all good news for someone selling a home, but as we know, it is rough for folks purchasing one.
With rates ticking back down, vaccinations administered, and economies reopening, we should expect continued strength in housing and hopefully more inventory available for sale.
Bottom line: This is an amazing moment to take advantage of the current interest rates as the present improvement in rates could be short-lived.