Headed Back to the Future

Last Week in Review: Headed Back to the Future

This past week, the U.S. 10-year Note yield, a proxy for long-term interest rates, climbed back above .80% for the first time since June.  At the same time, mortgage-backed security prices, which determine home loan rates, declined to their lowest level since July, pushing mortgage rates higher.

Why?

Stimulus, Stimulus, Stimulus

With two weeks to go before the election, it’s not a matter of if, but when a stimulus plan is coming. At the moment, it’s looking like a plan of at least $2 trillion or more and the markets are preparing for the “future”, which looks like further economic expansion and a growing threat of inflation — both of which Bonds and rates hate.

In addition to the positive economic outcome, stimulus provides, the new stimulus must be purchased by investors through Treasury auctions and the increased supply weighs on prices and drives yields/rates higher.

Don’t Fight the Fed

This recent rise in rates has the Fed’s attention. At the moment, the Fed is purchasing $120 billion worth of Treasuries and Mortgage Bonds each month to help pin down rates. Should Treasury yields continue to climb and drag Mortgage Bond prices lower still, causing home loan rates to rise, it is very likely that the Fed will step in and either buy even more Bonds and/or institute some sort of Yield Curve Control (YCC) to pin down long-term rates.

The Fed wants to further stimulate the economy by giving more and more people the ability to refinance or purchase a home, and much higher rates would prevent those efforts.

Bottom line: Rates are just above all-time lows, and as we are already starting to see, they may not be for long.