Interest rates will be suspended until the next chapter in the complex saga of Covid against the market is written. this is not to say that rates are absolutely unchanged – simply that the prevailing momentum has been sideways for the past few weeks.
Since mortgage rates only change once or twice a day, we can use the yields on 10-year government bonds to see more specific details. The entire week was in the fairly narrow 1.29 to 1.21 range and ended with returns right in the middle at 1.25%.
Zoom out a bit and 1.25 stays in the middle of a slightly wider (but still very “sideways”) area.
What’s the point Bonds (and hence “interest”) rummage through a period of indecision while waiting for clarity. Ultimately, bonds are most interested in things like the economy and Fed policy. The economy and the Fed, in turn, are heavily dependent on the Covid outlook.
The burning question: Will the delta surge cause only a fraction of the damage to the economy seen during the first Covid surge?
It sure doesn’t look like it’s in the same league right now, but the point is, we are anyway forced to wait. In fact, it’s not unfair to say that bonds are lost in the desert between two well-known cities: one pretty nasty in terms of interest rates and another that is just as nasty from a public health perspective.
Where should clarity come from? It’s complicated. The Fed can give us clarity on how it will go about things. We got a foretaste of this on Wednesday with the publication of the minutes of the last Fed meeting. But this meeting took place in late July and a lot has changed since then.
For this reason, many market participants seek clarity from Fed Chairman Powell when he speaks (practically) at the Fed’s Jackson Hole Symposium this coming Friday. Based on the tone in Wednesday’s minutes, it would be a surprise to see Powell signal an abrupt shift one way not yet about the Fed’s interest-friendly policy.
That more important clarity comes from Covid numbers. In fact, all other sources of clarity depend to some extent on the Covid outlook. The markets know that. Therefore, large fluctuations in Covid numbers offer one of the simplest explanations for general interest rate trends.
Dealers looking forward the curve can refine the acceleration and deceleration in daily case counts. While the falls are obviously still rising, they are not rising as quickly. If this trend continues (and especially if it reverses) it will become increasingly difficult for bonds and rates to stay in shape. In other words, falling daily caseloads would be a strong argument in favor of upward pressure on interest rates.
What does it all mean in pure English? Prices are low – much lower than most expected at this point in the year. The main reason is the “delta” and the Fed’s patient approach to changing interest-friendly policy. The ongoing concerns about the nature of the post-Covid economy are also on the list.
For what it’s worth, the Fed may have been almost as patient without the delta variant. You have said time and time again that there is a lot to learn about the state of the post-Covid economy to the new school year begins.
Right now, the economic data is mixed depending on where you look. In many cases, the numbers have returned in line with pre-Covid trends. housing (updated this week) is an example of this, with a sharp drop at the start of the pandemic and a now decided correction to long-term highs.
Not surprising, Self-confidence of the home builder (also released this week) followed a similar path.
Mortgage applications (published every week) show a similar trend on the buying side, but refinancing logically remains elevated due to the persistently low interest rates.
Next week brings a more robust economic data calendar, but expect it to be overshadowed by Powell’s speech on Friday (currently scheduled for 10 a.m. ET).