The bond market has pointed this out higher Prices since last August. Mortgage rates could defy This trend started first, but eventually began to peak in the New Year. February and March were two of the worst consecutive months in years.
The higher the interest rates, the more likely it became that we would see at least some kind of backlash in the other direction. Anticipation and fear were high when interest rates rose Long-term peaks End of March. Now, two weeks later, April is clearly the month we were hoping for. Interest rates have not fallen as quickly since the pandemic began
What about the change of heart?
The bond market (which dictates interest rates) has a few major sources of motivation. “The economy” is at the top of that list. Indeed, a better economic outlook (due to vaccines, falling case numbers, incentives, etc.) has been an integral part of the recent rate hike. Ironically, strong economic data seemed to have that opposite effect on prices this week.
Thursday was the best example of this paradoxical reaction. Two important reports were released at 8:30 am CET. Weekly jobless claims fell significantly, eventually reaching levels that were pre-pandemic (even if we have to go back to the financial crisis to see something high).
There was a clear victory in the retail report, which rose 9.8% in March. Economists were expecting 5.9% after a 2.7% decline in February. This was one of the three strongest reports ever recorded. But it also coincided with the 3rd round of stimulus checks to alleviate Covid relief.
The “stimulus effect” could explain why the bond market was able to look beyond the data. Bonds continued to improve throughout the day, with 10-year government bond yields eventually reaching theirs the lowest Levels in more than a month.
The thought of discounting the data based on stimulus payments is insufficient to explain this week’s strong performance. Bonds were easy on a mission to improve, and that was usually the case for the entire month. It is not uncommon for a new month to be pushed back in the other direction after strong momentum in the previous month.
Imbalanced trading positions were also prone to being “squeezed”. In particular, a large number of traders with “short” positions (ie betting on higher interest rates) were forced to cover these positions (by buying) as bonds improved. More buying creates more short covering, and pretty soon it becomes one Snowball move in the direction of lower yields / rates.
There was some additional evidence for the “snowball” thesis as yields rose again on Thursday afternoon (i.e., interest rates didn’t really mean they fell that much). By Friday, most of the improvement was gone, but not enough to derail the previous trend in April.
How long can these good times last? It is the market! You can never be sure.
If everything goes rightSeasonal patterns point to a yield low in June / July / August. That has happened in 6 of the last 10 years. It is impossible to know how much interest rates could fall, but there is definitely more resistance in that direction. A greater improvement in interest rates would be reserved for worse economic scenarios – the kind we frankly don’t want to see, no matter how much we like low interest rates.
When things go badInterest rates are unlikely to be much lower before starting a steady spike towards higher highs in the months ahead. How high it is depends on several factors. However, in previous newsletters we highlighted a precedent suggesting 2.4% of 10-year government bond yields – roughly 0.80% higher than current levels. Mortgage rates tend to move at a similar pace, especially now that the post-pandemic segregation has been resolved.
Selected charts from the week’s other economic reports:
The consumer price index (CPI) is one of the keys inflation Reports. The Fed will continue to buy bonds and keep short-term rates low until that number (and others who like it) is consistently closer to 2.5%. This week’s release clearly states, “We’re not there yet.”
Housing begins Measure the number of new build projects that have reached the breakthrough phase. This week’s report (for March) was the best since before the financial crisis.
In view of the construction figures, it is no surprise to see Builders’ trust stay near all-time highs.