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Home loan rates have improved once again finishing the year at the best levels since May. Let’s look at what happened in the final trading week of the year and discuss what to watch as the new year begins.

3.83%

The 10-year Note continues to hover near 3.83%, exactly where 2023 began. But as we all know, this is an enormous improvement in rates. In just the last nine weeks, the 10-year note declined from 5.11% to current levels.

The two-month decline in Treasury yields is the largest since 2008, when the Federal Reserve was aggressively cutting rates.

This decline in Treasury rates have helped mortgage rates immensely. In late October, 30-year mortgage rates went from 8% to something in the 6’s. That is amazing relief!

Why the Improvement and Rates?

Rates around the globe are declining. Countries like Germany and the UK are watching their government bond rates slide lower as their economies are in poor shape. The German 10-year bund is at the lowest yields since late 2022. As rates around the globe move lower, so do rates here in the States.

Yet, our rates have not improved as much as others around the globe. Why? Our economy, while slowing, is performing far better than others around the globe. Additionally, our unprecedented amount of deficit spending is applying upward pressure on interest rates, so yes, rates have improved, but not as much as other countries around the globe.

Fed Rate Cuts in 2024

Entering 2023 interest rates were in a similar position, but in 2023 the Fed hiked rates multiple times through July. In 2024, it is widely expected that the Fed will start cutting rates. There is a difference of opinion, as to how many rate cuts we will see. The Fed, who is a very bad forecaster on the economy, inflation and interest rates, is suggesting they will only cut rates three times. However, the Fed Funds Futures market which prices in the probability of Fed hikes/cuts is currently pricing in as many as six rate cuts.

This is a big difference between what the Federal reserve is thinking and what the markets are thinking. Incoming data will decide when and how much the Fed cuts rates. It is an election year and history has shown the Fed is more likely to cut rates sooner rather than later. Again, if history is any gauge, the first rate cut comes about eight months after the last hike setting us up for a cut by April.

Looking ahead

The Big news may not come from the economic calendar, but from the turning of the calendar itself. Every year we see a lot of volatility in stocks and bonds as institutions and traders take positions and place bets. Last year we watched the 10-year Note go from 3.83% to 3:20% in January. Who knows what will happen this year, but we should expect a sharp move one way or the other.

The "Santa Claus Rally" in stocks is an often-discussed phenomena in the markets, but it was the bond market that has displayed some holiday cheer this year. Let's discuss what happened last week and look into the final trading days of the year.

Crazy 8's

In late October 30-yr mortgage rates hit 8%; the highest in this century. Since that time, the bond market has been on a tear with rates declining for 8 consecutive weeks.

Reasons for the sharp decline:

1. Inflation moving lower.

2. Anticipating the Fed is done hiking rates.

3. Labor market is loosening up.

4. Oil prices have declined sharply.

5. Fears of recession are throughout the globe.

3rd Quarter GDP in the Books

U.S. Gross Domestic Product (GDP), like many economic reports, issues multiple readings before submitting a final report. In the case of GDP there are three reports. Last Thursday, the final reading for 3rd quarter GDP was released and it came in at a strong 4.9% clip. The market took the good news in stride. Why? Because of the 3rd quarter which ended in September. This means the markets are not paying much attention to the backward-looking reasons and are more focused on where the economy is headed. The Atlanta Fed GDPNow, which had been accurately forecasting the strong GDP reading for the 3rd quarter, is currently forecasting 4th quarter GDP to come in at 2.7% or roughly half the pace of the 3rd quarter. So the economy is indeed slowing and is a reason why the Fed's next move is to cut rates.

3.84%

If the 10-yr Note yield finishes the year beneath 3.84%. Rates will be lower on the year, which is a crazy thought after the historic spike late summer.

Bottom line: The bond market is finishing off the year in fine fashion and interest rates will be right where the year began. Except, unlike this year where the Fed hiked rates, they will be cutting in 2024.

This past week the good vibes in the financial markets continued. Interest rates hit their best levels since the Summer and continued their historic run lower. Let's discuss what happened and look at the week ahead.

Winning Streak Extends to Six

Through late October, we were experiencing one of the worst bond market/interest rate trends in our lifetime. But a culmination of weak inflation data, weak labor market news and rising expectations of an economic slowdown has prompted one of the sharpest rate improvements in decades.

How good has it been? Home loan rates have improved for six straight weeks after touching 8.00% in October. So, like the old hit show was titled "Eight is Enough".

Fed is Done

Part of the reason for the rate improvement is the idea the Fed has finished hiking rates. We will likely find out for sure over the next week as there is a ton of important data and a Fed Meeting. As of this moment, the Fed Funds Futures market is pricing in no more hikes and a reasonable chance of a rate cut by March.

History is on our side. If you look back at the previous four rate hiking cycles over the last 30 years, on average the first rate cut comes 8.6 months after the last hike. In this cycle, the Fed last hiked rates in July, which means, by historical standards we could see a rate cut by April.

Markets are forward looking, so the improvement in rates we have seen is the bond market expecting the Fed to be done.

Help Wanted Signs Disappearing

October showed the number of jobs available declined by 617,000 to 8.7 million. This number was less than expected and highlights the slowdown in the labor market. This is what the Federal Reserve wants to see as it slows demand and tamps down inflation. It is also yet another data point to support the Fed's next move being a rate cut as they want to be very careful not to push the economy into a recession with excessively higher rates.

The Quote of the Week

"Persistently high interest rates would present a "somewhat greater challenge" for the government." Treasury Secretary Janet Yellen

Quotes like these remind the world that higher rates are a problem and seeing this decline continue is both likely and welcome.

4.00%

The 10-year Note yield has declined from 5.00% to just above 4.00% in the past six weeks, highlighting the rapid rate improvement we discussed above. The 4.00% level is worth following closely. It may take even more bond-friendly news to push yields into the 3's, which virtually no one was forecasting six weeks ago.

Bottom line: Interest rates have improved at a record pace the last six weeks. Now our eyes are set on yet another huge news week, which may very well define whether rates can improve another level or not.

Home loan rates have enjoyed the sixth consecutive weekly decline as bond friendly news continues to hit the wires. Let's review what is happening in the financial markets, the economy and prepare for a big news week ahead.

Winning Streak Extends to Six

Through late October, we were experiencing one of the worst bond market/interest rate trends in our lifetime. But a culmination of weak inflation data, weak labor market news and rising expectations of an economic slowdown has prompted one of the sharpest rate improvements in decades.

How good has it been? Home loan rates have improved for six straight weeks after touching 8.00% in October. So, like the old hit show was titled "Eight is Enough".

Fed is Done

Part of the reason for the rate improvement is the idea the Fed has finished hiking rates. We will likely find out for sure over the next week as there is a ton of important data and a Fed Meeting. As of this moment, the Fed Funds Futures market is pricing in no more hikes and a reasonable chance of a rate cut by March.

History is on our side. If you look back at the previous four rate hiking cycles over the last 30 years, on average the first rate cut comes 8.6 months after the last hike. In this cycle, the Fed last hiked rates in July, which means, by historical standards we could see a rate cut by April.

Markets are forward looking, so the improvement in rates we have seen is the bond market expecting the Fed to be done.

Help Wanted Signs Disappearing

October showed the number of jobs available declined by 617,000 to 8.7 million. This number was less than expected and highlights the slowdown in the labor market. This is what the Federal Reserve wants to see as it slows demand and tamps down inflation. It is also yet another data point to support the Fed's next move being a rate cut as they want to be very careful not to push the economy into a recession with excessively higher rates.

The Quote of the Week

"Persistently high interest rates would present a "somewhat greater challenge" for the government." Treasury Secretary Janet Yellen

Quotes like these remind the world that higher rates are a problem and seeing this decline continue is both likely and welcome.

4.00%

The 10-year Note yield has declined from 5.00% to just above 4.00% in the past six weeks, highlighting the rapid rate improvement we discussed above. The 4.00% level is worth following closely. It may take even more bond-friendly news to push yields into the 3's, which virtually no one was forecasting six weeks ago.

Bottom line: Interest rates have improved at a record pace the last six weeks. Now our eyes are set on yet another huge news week, which may very well define whether rates can improve another level or not.

Home loan rates continued their decline which started at the beginning of November. Let's look at what happened this past week and prepare for the big news ahead.

Bonds Enjoy the Best Month in Forty Years

So how good has the bond market been in November? According to Bloomberg's widely followed U.S. Aggregate Bond Index, the 4.3% gain in November was the largest since 1985. During the month, we have watched the 10-yr Note, which ebbs and flows with mortgage rates, move from 5.00% down to 4.25%.

Sensing the Fed is Finished

If the decline in inflation continues "for several more months ... three months, four months, five months ... we could start lowering the policy rate just because inflation is lower," Fed Governor Christopher Waller.

Likely the biggest driver of interest rates over the past couple of weeks is the idea that the Federal Reserve has finished hiking rates. Fed Governor Waller, quoted above, is one of several Fed officials suggesting the Fed's next move could indeed be a rate cut.

Bill Ackman, CEO of Pershing Square, who shook the markets in late October when he said he covered his bet against higher rates, recently suggested that the federal reserve may need to cut rates aggressively in the first quarter of 2024 to avoid a hard economic landing. It is worth noting that he is alone on that consensus, but he was also alone last month when he said Treasuries yielding 5% is too high in this risky world.

If the Fed is indeed done hiking rates, it means the last rate hike was in July and, that is when the clock starts as it relates to when a rate cut would happen. For reference, over the last four rate hiking cycles in the past 30 years, the Fed cut rates on average of 8.65 months after the last hike. So, if history is any guide, the Fed would cut rates by their April 30th /May 1st, 2024 meeting.

GDP Was Not Gross, Markets Move On

The second reading of our 3rd Quarter gross domestic product (GDP) was reported at a robust 5.2% from a previous reading of 4.9%. Normally, such a strong reading would mean higher rates, and possibly more Fed Rate hike activity. But the markets are forward looking, and it is widely expected that the fourth-quarter GDP will reside somewhere near 2%, a sizable decline from the current rate. Moreover, the GDP number was bloated because of excess government spending, which is unsustainable. Bottom line, the economy is growing, but it is not overheating, and does not require more Fed hikes.

Inflation Continues to Decline

The Fed's favored gauge of inflation, the Core Personal Consumption Expenditure (PCE) index, came in at 3.5% year-over-year, the lowest level in a couple of years. It remains well above the Fed's target of 2%, but it is headed in the right direction which is lower. This is yet another data point to allow the Fed to pause hiking rates and let the series of hikes over the last couple of years further set into the economy.

Bottom line: It appears that the Federal Reserve has finished hiking rates, and the peak in long-term rates is in. If you or someone you know is interested in buying a home now would be an incredible time, because if rates continue to drift lower it is going to attract more buyers and increase competition.

This past week interest rates held near the best levels in two months in response to bond-friendly news. Let's review what happened last week and look at what to watch for this coming week.

Inflation is Declining

Disinflation, or the rate of inflation declining, is in full bloom. The Consumer Price Index was reported on Tuesday and showed the rate of inflation continues to decline. This is great news. The Federal Reserve's dual mandate is to promote maximum employment and maintain price stability. They want to see unemployment start to rise and prices start to fall. On the former, the last jobs report did show the labor market showing signs of cracking. Now, we are seeing consumer prices start to drift lower.

The takeaway? It likely means the Federal Reserve has finished hiking rates. It also means the last rate hike was back in July. This is also important because when the Fed says, "higher for longer", we must remind ourselves that the clock starts ticking in July as to when we will see a rate cut. Fed Fund Futures are currently pricing in a small possibility as early as next March.

Don't Tell the Fed

Despite a rash of economic news, suggesting that the Federal Reserve should be finished hiking rates - don't tell the Federal Reserve that. Fed officials were out in full glory, suggesting that the Fed may not be done with hiking rates yet. Why would they say such a thing when the data suggests that economic conditions are moving in the right direction for the Federal Reserve to pause? Likely, they do not want to take a victory lap.

Inflation is coming down, the labor market is indeed starting to loosen, and the economy is slowing. This is what the Fed wants to see and the rally we have seen in both stocks and bonds supports the likelihood that the next Fed move will be a rate cut.

Shorts Get Scorched

Markets are made with people on both sides. There are those betting on higher prices, and the other side betting on lower prices.  Over the last several months, there has been rising short interest in the bond market. This means many people are betting on higher rates. Well, as you can imagine over the past couple of weeks with interest rates improving, folks betting on higher rates, really got hurt. What the rising short interest has also done, is exaggerate and quicken the pace at which interest rates have improved from the peaks of this year.  In the matter of just a couple of weeks, we watched the 10-year note move from 5% to under 4.50%.

What to watch for? Data or news that gives those betting on higher rates, a reason to celebrate. Any unfriendly bond news could quickly erode the nice rate relief we have experienced.

Bottom line: It appears that the Federal Reserve has finished hiking rates, and the peak in long-term rates is in. If you or someone you know is interested in buying a home now would be an incredible time, because if rates continue to drift lower it is going to attract more buyers and increase competition.

This past week, interest rates held steady and near the best levels in over one month. Let's look at what happened last week and peek into the week ahead.

Treasury Selling More Debt

Last week, the Treasury Department sold over $100 billion worth of Treasuries, to fund the government. The increase in our deficit spending and subsequent debt downgrade during the summer was a reason for the spike higher in interest rates. So, every time there's an auction, markets are on edge as to what the appetite will be to purchase these bonds. If buyers do not have a strong appetite to purchase our debt at current interest rates, the Treasury Department must give higher yields or rates to entice buyers to purchase the bonds. And as treasury rates go higher, so do mortgage rates.

The auction results last week were OK, meaning the Treasury Department was able to sell all the new debt without increasing rates – however, the purchasing demand was less than stellar.

"If the rise in bond yields is sustained, the Fed will have to think about the tightening impact of those credit conditions on economic performance, and would there be dangers of overshooting" - Chicago Fed President Austan Goolsbee.

Fed Officials Soften Tone

A host of Federal Reserve officials were out and about last week. As always, they never speak in unison and say the same thing about monetary policy and economic conditions. However, a common undertone amongst the officials was that higher long-term interest rates have tightened financial conditions and are doing the job of the Fed. For example, with mortgage rates hitting 8% a few weeks ago, housing activity and thus economic activity slowed, thereby removing the need for the Fed to raise rates. As of this moment, the Fed Funds Futures, which prices the probability of Fed rate activity, are pricing in no further rate hikes. This is good news, as the last Fed rate hike was in July and as time passes, the chance of a Fed rate cut increases.

Lower Oil Equals Lower Rates

Oil has dropped to the lowest levels in months, falling beneath $80 per barrel. This, as China and other countries around the globe teeter on the brink of recession. Oil prices move on supply and demand. So as demand slows because economic activity slows, prices go lower. Lower oil prices help lower inflation expectations, which ultimately help long-term bonds like mortgages.

4.50%

The 10-yr Note yield, which ebbs and flows alongside home loan rates, has declined nicely from a recent peak of 5.00%. Watch 4.50% as a floor of yield support which is currently halting any further decline in rates. If the 10-yr Note moves beneath 4.50% that floor will become a ceiling which could help halt an increase in rates.

Bottom line: Long-term interest rates, like mortgages, have improved nicely from the highest levels in the century. The sideways trading action we witnessed this week is a good sign as the markets try to consolidate the fast gains. We may have very well seen the peak and long-term interest rates, but it will not be a straight move to lower rates ahead.

This past week, the Federal Reserve did not raise rates, and long-term rates, like mortgages, declined to the best levels in a month. Let's discuss what happened and discuss the big news items to watch for this coming week.

The Fed

On Wednesday, the Federal Reserve issued its monetary policy statement and decided to hold rates steady at 22-year highs. The main reason? Long-term rates have risen of late, which has caused financial conditions to tighten, thereby slowing the economy, and doing the job of the Fed.

The bond market loved the news and the lack of tough talk during Fed Chairman Jerome Powell's press conference, pushing rates lower.

But the good news for bonds and rates didn't stop there.

Treasury Borrowing Less

This week the Treasury Department announced slightly less borrowing needed to fund the government for the last quarter of the year. They also stated they are likely to issue fewer long-term bonds like the 10-year note and 30-year bond. This was also good news for the bond market as it meant less supply had to be sold which meant less pressure to provide higher interest rates or yield to attract buyers.

It wasn't all good news that helped bonds improve and push rates lower.

U.S. Manufacturing Continues To Contract

On Wednesday the Institute of Supply Management (ISM) Manufacturing Report showed the 12th consecutive month of contraction. This tells us manufacturing in our economy is not doing that well and any bad economic news is good for bonds and rates.

It wasn't just U.S. news here that helped interest rates improve.

Europe Sees Disinflation

Across the pond, many countries in Europe reported lower-than-expected inflationary numbers. Inflation is a major driver of long-term rates. As it goes up, so do rates. The opposite is true.

Additionally, the bond market is global. As yields in other parts of the globe decline, so do ours. And again, the opposite is true.

5.00% Is The Ceiling To Watch

A couple of weeks ago the 10-year note touched 5% a couple of times but did not close above that key level. It has since retraced lower to 4.69% on Wednesday. If the 10-year note can remain beneath 5%, long-term rates like mortgages have an opportunity to stabilize, and potentially improve further from here.

Bottom line: It was a welcome sight to see rates improve. For rates to improve further, we must continue seeing more headlines like this week. If economic data doesn't heat up again, the Fed may very well not hike rates again...which is terrific news.

This past week, home loan rates hovered near the highest levels in this century. Let's look at what moved the markets and look into the week ahead.

European Central Bank Pauses Rates Hikes

European Central Bank (ECB) President Christine Lagarde did not hike rates this past week, citing economic weakness. This action and statement from Lagarde helped bonds hold steady and improve from the worst levels. Markets sense our Fed will follow suit next week and beyond.

Blackout Period

One uncertainty was removed last week as Federal Reserve officials were in the blackout or "quiet" period heading into the Fed Meeting. This is where Fed members do not make any speeches or comments on monetary policy 10 days before the next Meeting. Unfortunately, the financial markets were not so quiet.

More Money, More Problems

One big problem for interest rates throughout the summer has been the increased government spending and the need for the Treasury Department to sell bonds to fund the government. This past week was more of the same, as the Treasury Department sold $140 billion worth of bonds and the appetite from investors was not so great. Meaning, that to entice investors to buy the enormous amount of bonds, they had to give higher interest rates. And as interest rates in the Treasury Market go higher, it puts upward pressure on mortgage rates as well.

New Home Sales Up In September

New home construction continues to be a bright spot in housing, despite high interest rates. Sales in September came in at an annual rate of 759,000; well above expectations and the best reading since February 2022. Price concessions and rate buy-downs were made by builders to help sell homes.

Shorts Are Back

After a week, where legendary hedge fund owner, Bill Ackman said this was not in the environment to bet against higher rates, his peers thought otherwise. The fast spike in interest rates that we witnessed in response to the poor Treasury auctions mentioned above, was amplified by traders placing large bets on higher rates in the future.

3rd Quarter GDP

The first reading of 3rd quarter GDP (economic growth) showed the economy grew at the fastest rate in 2 years which was fueled by consumer spending. This strong report may not influence the Fed's decision to hike rates again as the report is backward-looking and most economists expect the growth rate to slow sharply in the 4th Quarter. The good news? The economy is not close to a recession.

5.00%

The 10-yr Note is hovering near a ceiling of yield resistance at 5.00%. If the 10-year yield breaks above this ceiling, it will likely accompany another leg higher in interest rates and 5.00% could go from being about as bad rates could get to about as good as they could get. So, this is something to watch closely.

Bottom line: Home loan rates have hit the highest level of this century. However, as evidenced by New Home Sales, the demand to purchase new homes remains high. There are key levels to watch to avoid another spike higher in interest rates.

This past week home loan rates touched the highest levels in this century. Let's talk about the recent headwinds for interest rates and other big events as we march toward the next Fed meeting on November 1st.

Headwind #1 - QT

Back in 2020, to stabilize the U.S. bond markets, the Federal Reserve began a process called quantitative easing (QE). This involved the Federal Reserve purchasing Treasuries and mortgage-backed securities and adding them as assets on their balance sheet. This process helped stabilize the bond market during the pandemic and lowered rates beneath 3.00%.

Today, to fight inflation and slow demand, the Federal Reserve is doing the opposite, in a process called quantitative tightening (QT) or balance sheet reduction. This is where the Fed allows matured Treasuries and refinanced mortgage bonds to roll off their balance sheet. This process has put upward pressure on long-term rates, with 30-yr Fixed rates hitting 8.00% this week.

In the absence of the Federal Reserve stopping or slowing the quantitative tightening process, we should expect the trend of higher interest rates to continue.

Headwind #2 – Debt

The U.S. has amassed a record $33T in debt with no signs of the deficit spending coming to end. This means our government will have to issue more Treasuries to collect the money needed to run the country. Every couple of weeks, the Treasury sells these bonds, however the buying appetite has been weak, so the Treasury Department has to pay more yield to attract the buyers.

Headwind #3 China And Japan Are Sellers

Japan and China are the largest foreign countries in the world holding U.S. debt, with close to $1.5T between them. Both countries have been sellers of our bonds as opposed to purchasers of our debt. Why? Inflation. The U.S. dollar has been strengthening mightily throughout the year, causing foreign currencies to decline in value and making commodities and imports more expensive. China and Japan have been selling some of their vast holdings while using the proceeds to purchase their own currencies to limit the effects of inflation.

Headwind #4 Short Sellers Betting On Higher Rates

In the financial markets, one can bet on prices going up or prices going down. Short-sellers or people who are betting on Treasury prices, and mortgage bond prices going down and rates going up realize that the Federal Reserve is shrinking their balance sheet, growing our debt while Asia and other countries around the globe are selling U.S. debt. This short selling is adding to the volatility and sharp move higher in rates.

These are just four of the headwinds long-term bonds are facing now, as there are more. How does this trend of spiking long-term rates end? One way to quickly stop this rise, is for the Federal Reserve to announce a slowing or outright stopping of quantitative tightening or balance sheet reduction. This would put a buyer in the market, push back the sellers and take pressure off Asia to sell their U.S. bonds. This is not currently in the cards but is a story that could change very quickly.

Housing, which is interest rate sensitive, and a main driver for the economy has slowed significantly with mortgage applications at the lowest levels since 1995. There is a moment coming where the Federal Reserve may be forced to pivot and change direction as the current trend is unsustainable.

Bottom line: Home loan rates have hit the highest level of this century with housing activity slowing and leaders in mortgage and housing sounding the alarm for help…each day is closer to a shift in policy.