October 23rd, 2020 11:35 AM by Eric Fang
Rocking the 80s
This past week, the U.S. 10-year Note yield, a proxy for long-term interest rates, climbed back above .80% for the first time since June. At the same time, mortgage-backed security prices, which determine home loan rates, declined to their lowest level since July, pushing mortgage rates higher.
Stimulus, Stimulus, Stimulus
With two weeks to go before the election, it's not a matter of if, but when a stimulus plan is coming. At the moment, it's looking like a plan of at least $2 trillion or more and the markets are preparing for the "future", which looks like further economic expansion and a growing threat of inflation -- both of which Bonds and rates hate.
In addition to the positive economic outcome stimulus provides, the new stimulus must be purchased by investors through Treasury auctions and the increased supply weighs on prices and drives yields/rates higher.
Don't Fight the Fed
This recent rise in rates has the Fed's attention. At the moment, the Fed is purchasing $120 billion worth of Treasuries and Mortgage Bonds each month to help pin down rates. Should Treasury yields continue to climb and drag Mortgage Bond prices lower still, causing home loan rates to rise, it is very likely that the Fed will step in and either buy even more Bonds and/or institute some sort of Yield Curve Control (YCC) to pin down long-term rates.
The Fed wants to further stimulate the economy by giving more and more people the ability to refinance or purchase a home, and much higher rates would prevent those efforts.
Bottom line: Rates are just above all-time lows, and as we are already starting to see, that they may not be for long. If you or someone you know would like to talk about the incredible opportunity for housing, please contact me.
In addition to the stimulus hopes, forthcoming election results, coronavirus cases rising around the globe, vaccine hopes, and more economies opening, there is a boatload of economic reports set for release next week that can move the markets.
There is also another round of Treasury supply hitting the Bond markets. It will be interesting to see if the recent increase in yields will be enough to attract investors.