Oversupply of Bonds and Unemployment

Last Week in Review: Oversupply of Bonds and Unemployment

One week after home loan rates failed to improve further in the face of multiple Bond-friendly stories, such as low inflation, high unemployment claims, and the Fed’s continued commitment to purchase Bonds, we watched home loan rates tick up this past week.

Why?

Oversupply. The U.S. Treasury announced they will need to borrow $3 trillion through the third quarter of 2020 to pay for the economic stimulus package related to the coronavirus. In order to “borrow” the $3 trillion, the Treasury will issue a new 20-year Bond that will need to be purchased by investors.

Investors, at the moment, are showing early signs that rates will need to tick higher to meet the buying demand for this enormous new supply of Bonds. Early in the week, the 10-year yield hovered near .60% but ticked higher to .73% during the week and this weighed on mortgage-backed securities, which home loan rates are derived from.

On Friday, the Bureau of Labor Statistics reported that 20,500,000 were unemployed in April, lifting the unemployment rate to 14.7%. It was the worst Jobs Report in the history of the U.S.

Home loan rates didn’t improve in response to the horrible “oversupply” of unemployed shown in the Jobs Report. This is because the markets are forward-looking, and April’s Jobs Report is backward-looking.

Bottom line: The Bond market is more focused on the additional supply of Bonds that will need to be purchased and the cautious optimism seen in reopening parts of the U.S. economy. For this reason, consumers who have an opportunity to lock home loans at current all-time low rates would be wise to do so.