2021 was not a great year for mortgage rates – at least not in terms of their evolution. But that could change. Even if it doesn’t get any better from here, the last 3 weeks overall are the best we’ve seen since January.
Mortgage rates are mainly determined by the daily movement in the bond market. There is a particularly strong correlation between 10-year government bond yields and mortgage rates. While this is definitely was not For much of 2020, the correlation is now generally intact again. As such, the ability of 10-year government bond yields to stay below the 1.75% cap coincided with the resilience of the mortgage market.
If we zoom in on the blue line, we can see that 10-year returns are deviating from their dominant trend for 2021 and starting to move sideways in recent weeks.
It was only a matter of time before the rise in interest rates gave way to such consolidation. The bigger question is how long it will take and how much lower could the prices go?
Financial markets are always do their best predict the answers to all these types of questions. In other words, if we knew that rates were sure to go much lower or higher, they would already be there. Traders are waiting to see if a recent surge in Covid cases is a major threat. New variants are particularly worrying, but the financial markets won’t be too disrupted if the numbers don’t rise enough to keep the bans off.
In general, “bad things” (more covid, weaker economy) are good for interest rates, but the opposite is also true (less covid and stronger economy = higher interest rates). Given this general truth, it comes as a kind of a surprise to see this week’s strong economic data contrast with decent net interest income.
At the top of the fee was an important report on the services sector, the ISM Non-Manufacturing Index. Together with its double report on manufacturing, ISM provides an up-to-date barometer for the economy as a whole (we are waiting a few more weeks for the first GDP estimate for the first quarter). This week’s ISM report was pretty strong – the strongest in the record, actually.
The producer price index, which measures inflation at the wholesale level, performed similarly.
While students in the 70’s and 80’s will tell you this is coming nowhere near to a record it is much higher than it was. And high inflation implies higher rates. As such, it would be fair to expect upward pressure on interest rates, but actually interest rates FELL on the day of the report. They did the same thing on the day of the strong ISM report – also a counter-intuitive move.
What about it?
Do you remember that phrase about financial markets always trying to trade the future to the best of their ability? This is an important reason for the rise in interest rates already observed in 2021. The markets have expected Improve inflation and economic data. With that in mind, the strong data is really just a confirmation of what has already been assumed.
Interest rates also have considerations beyond economic data. Covid is of course the boss among these. When epidemiologists and traders are concerned about rising case numbers (and new variants), these concerns can be the focus. After all, the course of the pandemic will ultimately have one big word on the way of the economy.
After all, there are considerations that speak more for the fundamentals of the bond market, even if stemming from the pandemic and the economy. especially the output of new national debt (which is used to pay for things like Covid Relief Bills and other federal expenses) is one of the most important components of the interest rate equation. Perhaps more than anything, a surge in government bond issuance has been responsible for the most obvious rate hikes at various times over the past 5 years.
In this sense something This suggests that it may be more difficult for the government to spend as much money as previously thought to improve interest rates. West Virginias Senator Manchin provided exactly that on Thursday with a comment that challenged the $ 2.3 trillion infrastructure plan. Some are extremely important in this regard, as Democrats cannot pass legislation without their vote.
Some form of the infrastructure plan will eventually be adopted, but if it is less than $ 2.3 trillion or lasts longer, there is additional benefit to the bond market due to the lower supply of government bonds (i.e. downward pressure on interest rates when all other factors are equal are ).
On the demand side, we learn more about how retailers are feeling next week. Monday and Tuesday bring 3 large Treasury auctions (3 and 10 year banknotes for Mon and 30 year bonds on Tuesday). Bid statistics are published immediately after the auctions and can – occasionally – have a noticeable impact on prices set the tone for whole weeks in 2021.
With all the focus on rates, What’s the harm? We looked at that in terms of sales and prices last weekSo let’s take a look at the mortgage applications this week. There is no question that apps are not available due to the rate increase.
However, if we zoom out we can see that the current values are still there far up which seen in 2019. Indeed, you’d have to go all the way back to see more refinancing demand by early 2013 and more than a decade to see higher buying demand with the lowest inventory ever recorded. Purchase requests would likely be significantly higher if inventory was anywhere near pre-pandemic levels.
The inventory situation could improve if Fannie Mae’s home survey is any indication. The number of respondents who said it was a “good time to sell“rose to its highest level since before the pandemic.
To what extent this sentiment will be reflected in an actual increase in inventories remains to be seen. If you want to keep up to date on the situation in different metropolitan areas (along with a lot of other relevant economic information presented without an agenda or bias), https://www.calculatedriskblog.com/ is a great place to do it .