After dominating the news cycle for weeks, the debt ceiling issue is suddenly resolved and the bond market doesn’t seem to care. The jobs report proved to be far more relevant, but with half of it indicating a much stronger labor market and the other half saying the opposite, who’s telling the truth and why did rates only pay attention to the bad (good) news?
[…]
Memorial Day Special..! Hurry-up! Call AravindKCRealtor @ +1 (847) 970-1743 for more details….
It was nearly impossible to avoid news regarding the debt ceiling this week, but how much does it actually matter?
Let’s make sure we’re on the same page first. What follows are a few NON-POLITICAL thoughts on the debt ceiling, which is different than a “default.”
The debt ceiling has to be increased periodically in order for the US government to borrow enough money to fund day to day operations. There’s theoretically a point at which the government doesn’t have enough money to make payments that it had already agreed to make in the past. That money can come from the issuance of Treasury debt (i.e. borrowing) or from sources of revenue (such as taxes).
ArvindKCRealtor
The debt ceiling debate is all over the news, but it’s a different ceiling is commanding more of the bond market’s attention. Still, we wouldn’t say the debt ceiling is irrelevant, so let’s take a brief moment to address its implications for the housing and mortgage markets.
The first week of any given month tends to have the highest concentration of economic data with the power to influence the bond market, and thus interest rates. This week was no exception.
Mortgage rates fell nicely to start the week but only after rising rather abruptly in the previous two weeks. That said, short term ups and downs are just a sideshow in the bigger picture where rates have been locked in a pattern of indecision that will ultimately give way to the next big move.
The good news is that last November increasingly looks like the moment when rates stopped surging higher at the fastest pace in 40 years. The not-so-good news is that they still don’t seem sure what to do next.
The bond market moved far less over the entire week than it did during a single day last week. Not only was volatility much lighter, but the trading patterns changed as well.
At the onset of the recent panic in the banking sector, stocks and bonds shifted into risk aversion mode. Scary news pushed money out of stocks and into bonds. Promising developments did the opposite. This results in stock prices and bond yields moving with a high degree of correlation (because bond yields move lower when bonds increase in value).
There’s certainly a chicken/egg problem when it comes to interest rate news. Is it the Fed’s decisions that move rates? Or do market forces move rates, thus forcing the Fed to react?
The answer is somewhere in between. If inflation and economic growth were always positive, low, and stable, the Fed would never lift a finger, but they are compelled to act when stability is threatened.
Back on February 3rd, the last jobs report sent rates screaming higher. It was the biggest market mover of the month and traders have been waiting for the March 10th installment ever since. When it finally arrived, an unexpected guest stole the show.
Home sales are very low. Mortgage rates have spiked back to 7%. New mortgage fees have eroded affordability for some. But the news isn’t all bad.
When it comes to the mortgage and housing markets, there’s been no shortage of gloomy news for months. This generally involves slumping sales, lower prices, and higher rates. All of the above are interconnected to some extent. The interconnection can be summed up in a single paragraph:
Home prices surged post-covid as demand greatly outpaced supply and low rates increased buying power. High home prices (and rents) then contributed significantly to decades-high inflation numbers. Decades-high inflation is the single biggest reason for the fastest rate spike since the 1980s. Newly high rates made buyers increasingly reluctant to shop for homes and homeowners increasingly reluctant to give up the super low rates obtained over the previous 2 years.
Welcome to February 2023, where we’ve seen the first really serious leap higher in rates since October.
At the beginning of the month, the average 30yr fixed rate was around 6%. Now it’s closer to 7%. That’s not a typo, but it may be a surprise considering the widespread media coverage of the Freddie Mac weekly rate survey, which reported a modest jump from 6.12 to 6.32 this week.
Mortgage rates hit 5 month lows last week but quickly jumped to the highest levels in more than a month this week. While last week’s strong jobs report certainly served as a catalyst, there’s more to the story.
Fortunately, the story is fairly simple. It began in October when rates hit decades-long highs and finally began to make progress back toward lower levels. Inflation had been a pivotal component of the surge and inflation reports were starting to moderate in November and December. Simply put, a rate recovery made good sense.
In fact, lower inflation was desperately anticipated by financial markets. Interest rates, especially, had been on the defensive, waiting for a sign that the worst was over. Q4, 2022 arguably provided that sign, but there were serious questions to be answered about what would come next for rates.
The market began answering those questions in January. Mortgage rates and popular benchmarks like the 10yr Treasury yield had fallen an entire percentage point, but then paused to wait for the green light to drop some more.
Rates were right to be hesitant. By falling as much as they had, they were already playing a dangerous game of chicken with the Federal Reserve. The Fed controls and sets the shortest-term interest rates in an effort to control inflation. The Fed Funds Rate doesn’t directly dictate mortgage rates, but changes in the Fed’s rate outlook definitely impact mortgage rates. Conversely, a big enough drop in mortgage rates can carry implications for inflation (the thing the Fed is trying to fight by raising short-term rates).
Here’s where that game of chicken comes in. The market had been betting that the Fed would be forced to cut short-term rates by the end of 2023 even though Fed members had repeatedly said rates wouldn’t top out for a few more months at minimum and then remain at the ceiling for a year or two. The market thought the Fed was bluffing or wrong. Either way, those defiant expectations helped mortgage rates hit 5 month lows last week.
Then the jobs report happened (last Friday). It also happened 2 days after the Fed’s latest policy announcement. Markets began to panic. What would the Fed have done if it knew the jobs report would be so strong? Panic was amplified by the fact that Fed Chair Powell was scheduled for an informal Q&A the following Tuesday (February 7th) at the Economics Club of D.C. (a venue that would surely generate relevant questions).
Even before Powell took the stage, the market was already rethinking its game of chicken. Whereas Septembers Fed Funds Rate had consistently been expected to be lower than June’s, traders were quickly beginning to believe it would be unchanged. The following chart shows those expectations over time, both for the June and September Fed meetings. Note the gap that had existed up until this week.
[…]
There are those who always try to portray the glass as being half full when it comes to the housing market. Then there are those who love a full glass, but who also call it like
they see it. Right now, each camp has something to agree on: the glass is more full than it was last month.
Before proceeding, a disclaimer is in order. Outright measurements of housing market health are still not that great. We know that and have been discussing it for the better
part of a year as sales slid and rates spiked. That part is old news.
The new news is that there are a few signs of change. If things were to continue to change as they have in the past few weeks, people would really be talking about a bounce
in the housing market.
Mortgage rates officially hit their lowest levels in 4 months after this week’s inflation data. Despite the recent progress, Fed officials continue to talk about keeping rates high “for as long as possible.” Who’s telling the truth?
