Mortgage rates sell off again over inflation fears
Mortgage rates have been quiet for the past couple weeks but that ended yesterday as mortgage bonds sold off again over rising inflation concerns. It was not just over one report, but many showing inflation concerns that cause the sell off. These included manufacturing reports showing expansion but also showing increased costs, concerns with oil being over $70 per barrel and expecting that to rise, and continued trade concerns. The result is we are now another leg down and have a new trading channel. So far for today rates are holding; no doubt due to the reignition of some geo-political fears that have also be stoked the past couple days.
Housing news: Single family permits up .09% to 859,000 units- we are looking for this to hit a million, but will take any increase as a good sign. Mortgage apps down last week -2.7%.
Here is what to watch this week:
- Geo-political concerns- escalation will help rates
- No other reports due out this week that will move the needle
Commentary: All eyes are on the 10 year Treasury bill- both stocks and bonds. It is important to note here that the 10 year T-bill does not set mortgage rates but is an indicator for general rates. Typically the 10 year and other long term bonds, like mortgage bonds move in unison; but mortgage bonds are not reacting to the 10 year, instead they are moving on the same data because they both represent long term outlooks for the economy. However, stocks are reactionary and sold off yesterday in response to the 10 year rising. As interest rates rise, stocks will correct and give up some of the gains that were built on zero or near zero rates over the past decade.
Since stocks are reactionary, they should not be viewed as an indicator pointing to the health of the economy. I would like to say that long term bonds, like the 10 year, have a longer economic outlook and are what you should watch for indications on the market- but that is no longer entirely true either.
The bond market has also been propped up by the Fed. Since the Fed owns 40% of mortgage backed bonds, we are not seeing true interest rates. Not even close. There was a time when banks enticed savers to deposit funds into their bank by offering higher interest rates, then they loaned that money out to borrowers. As rates rose and borrowing decreased, they then lowered rates to entice borrowers back again. The market provided an equilibrium where savers and borrowers set the rate that the market was supporting.
We are so far from this now, that it is hard to even use economic outlook or principals to determine the direction of rates. The Fed is in now in control of this and is on a path to slowly raise rates to remove some of this artificial support; but this is an unprecedented move and we don’t how this will go or if it is even possible to do without causing a recession. So I watch and report economic news as it relates to mortgage rates but nothing reacts as it would in a normal market. What we do know is that there is a bubble created by the Fed in both the bond and stock market. We also know that as rates rise that means we have to pay higher and higher interest on our national debt. A 1% rise in rates will cost us 1 trillion in just interest on the debt. Think about that for a moment. So the question really is not what the economic outlook is currently but will the Fed keep its finger in the dam or not?
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