The 6.4% GDP figure for the first quarter of this week confirmed the notion of a strong economic recovery. The recovery, in turn, helps justify the sharp rise in rates over the same three months. Interest rates recovered significantly in April, but ended slightly increasing this week through some action. Is the break over?
The charts below provide different ways to look at the break (basically the pressure of April versus the last three months with significantly higher rates). Mortgage rates have outperformed other parts of the bond market, although they are heavily stratified by loan type and investor. Therefore, the break looks healthy at first glance.
The 10-year government bond yield (the epitome of broader, longer-term interest rate momentum) better shows this week’s modest upward drift, having risen multiple times at 1.53%.
If we zoom out we can see that the April consolidation / correction is right where we hoped it would be based on previous discussions about the “hitch” zone. In general, it means that The prices had risen enough to justify a break.
The towbar also serves as a memory about how much more mortgage lending could cover (or recover) if things go very well (or badly) for Covid and the economy. Indeed, that is what it is all about – a fact reiterated at this week’s press conference following the Federal Reserve’s announcement.
Fed Announcement Days have a track record of being some of the best (or worst) days for mortgage rates. That is, they can be complete meaningless also, and that’s the label we’d choose for this week’s version (if we could only choose one).
Is it true that the Fed kept “rates” unchanged at 0-0.25%? Yes, but it’s important to understand that this is referring to the Fed Funds Rate – a target rate for overnight inter-bank loans. Mortgage rates can loose correlate with the Fed Funds rate over very long time horizons, but they often move in the opposite direction. More importantly, mortgage rates are constantly changing, while the Fed Funds rate has not changed in more than a year (and typically can only change once every 6 weeks, except in exceptional circumstances).
So Why In the past, have mortgage rates had a big reaction to the Fed when the Fed Funds rate didn’t have a big impact on mortgage rates?
Simply put: In addition to announcing the Fed Funds Rate, the Fed is doing “other things”. This is just the part of the announcement that the news outlets tend to lead with. Mortgage rates are far more interested in the Fed’s bond purchase programs, which include $ 40 billion a month for buying new mortgage bonds (in addition to reinvesting proceeds from previous mortgage bond purchases). On this issue, the Fed remained stable, indicating that we are still a long way from a situation where bond purchases would taper.
Something Market participants have asked themselves Why the Fed continues to buy the same amount of mortgage-backed bonds amid the rapid pace of real estate appreciation. In this case, Tuesday brought Case Shiller and FHFA home price data for another month.
When asked about the ongoing buying of mortgage bonds, Fed Chair Powell reminded us that this is the mortgage market one of two Key sectors that the Fed can target in pursuing its goals. In other wordsThe Fed decided it had to spend a certain amount of money buying bonds, and the mortgage market is one of the top two places it can spend that money. Even though the mortgage market was fairly familiar with this narrative, it was nonetheless slightly relieved to receive additional confirmation – a major reason mortgage rates outperformed government bonds in the second half of the week.
While the Fed offers clear support in the present, traders continue to worry about the future. It is easy to imagine A scenario in which the economy is so well healed that the Fed can call back. If that happens, it could be the trigger for rates to officially break out of the interruption trend and continue their upward trend.
In the other apartment-related dates of this week, Pending home sales (the most recent of the home sales reports) avoided losing more ground after a 4 month decline. Realtors rightly point out that a lack of inventory is the biggest disadvantage for the otherwise record numbers.
Next week there is a slew of big ticket economic data that could further sway the recovery story, including the big monthly job report on Friday. If the new numbers are as strong as last time it would bring the Fed one step closer to the actual rejuvenation discussion. Prices probably wouldn’t love that. Stay tuned…