The last few days of March gave that hope The biggest rate increase of 2022 May be slow. The first few days of April shattered those hopes and things got worse as the new week started. After breaking above 5% last weekend, Monday morning brought the average 30-year fixed rate to 5.25%, which has not been seen since 2009.
To understand why, we need to reconsider the general impetus for rate hikes. Before we do, let’s put it “Massive“In context. It is not an exaggeration to say that this is the largest, fastest growth in mortgage rates since at least 1994.
For “Why,” It’s really straightforward. The Federal Reserve (sister “pet”) is very popular in setting the Fed Fund ratio, which dictates the cost of short-term financing. It raises and lowers that rate to keep inflation and employment within a certain range. They buy bonds (especially US Treasury and mortgage support bonds, especially when the central bank thinks it needs to cut the rate to zero and do more. Buying securities creates excessive demand in the bond market, which reduces long-term rates. This is basically a way for the central bank to affect short- and long-term rates.
At the beginning of the epidemic, there were financial markets Confusion And the central bank cut rates to 0% and offered to buy bonds at a faster pace than before. When markets begin to stabilize, the central bank decides to continue to provide as much cash incentives as possible in light of the Govt impact on the labor market, rather than withdrawing those bond purchases. They justified this Assumption Govt-driven inflation will fall as the epidemic subsides.
As we now know, Govt-related inflation Did not Will decrease. With the central bank’s own approval, it grossly miscalculated the stability of inflation and the health of the labor market. As 2022 approaches, we suddenly see a barrel of huge inflation numbers and a tight labor market for decades. Meanwhile, the central bank kept its Fed fund ratio at 0% and buys more than $ 100 billion worth of bonds every month.
Change came slowly at first. In September 2021, the central bank began to suspend new bond purchases – a process that must be completed before raising rates. A few months later, as inflation continued to rise and the labor market grew tight, the central bank began Accelerates Comes out of easy monetary policies, but like one A river warship.
By the beginning of 2022, central bank communications speak of a certain level of panic that has not been seen since the 80s. The central bank does No. I like to make big course corrections as soon as I start turning the proverb of the warship, but 2022 saw one kind of unexpected acceleration after another. This rapid review of the central bank and the rapid elimination of the bond purchase requirement will be the key ingredient in the rate increase seen so far in 2022. Last week brought up the latest iteration.
EspeciallyIn a prepared speech on Tuesday morning, Central Bank Vice President Lyle Brynard (one of the Fed spokespersons in general for high rates) joined the chorus of more hawk Fed members talking about the potential for a huge reduction in the purchase of Fed bonds. (Referred to as “normalization”). This is not a completely new concept as the Federal Reserve has already recorded that the normalization of 2022 will definitely be bigger and faster than 2017 – this is the only relevant precedent. The market was surprised to hear it from Brineard – at least in such compelling terms.
One of the reasons for the surprise is that Minutes will be released at the most recent Fed meeting (3 weeks ago). The Fed Minutes will contain additional clues about frequent policy changes. Traders Is considered correct The current version may have a bomb. It took a long time to smooth out the blow when the minutes actually came out.
So what’s the fuss?
In short, Minutes laid out a clear road map for normalization. Fed announces 2017 normalization process with $ 4 billion a month success in MBS (mortgage support securities) purchases, 2022 plan to start first phase at $ 35 billion per month! The contradiction is similar when it comes to central bank treasury purchases. Again, we know it will be bigger and faster, but not so big / fast.
We saw the pain after the Minutes release as the Fed was buying bond securities targeting long-term rates. In other words10 year treasury yields continued to rise while 2 year treasury revenue was able to recover.
Mortgage rates are concerned with 10-year yields, as 10-year yields generally speak of “long-term rate” trends. Alternatively, Forget it all Also note the connection in the following chart:
When long-term ratios are associated with short-term ratios, as you can see in the following charts, it is not very similar. Short-term rates rise and fall rapidly, and less frequently. Interestingly, however, when short-term rates are at their peak, relief is generally not far behind long-term rates. Unfortunately, we have not yet confirmed that peak.
So many things like this Very different The previous paradigm about this economic / monetary cycle is simply not useful. All we know now is that we are waiting for many important improvements. The most important of them is that the inflation data show signs of changing. It may take several months, during which time the bond market may have set a more cautious price.
Before that, we look forward to seeing what the Fed really does at its meeting in May. Of course they will hike, probably 0.50%. They are also likely to implement the default plan set out in the last few minutes. If that amount of damage, the market Finally Stay on the same page with the Fed (except for extra acceleration in the coming weeks). Paradoxically, a rate hike and a large reduction in securities purchases can actually be a good thing for long-term rates.
It Not for the first time We saw such a contradiction. Long-term ratios always do what they can to calculate future probabilities. If they know that the central bank can raise short-term rates or normalize bond purchases at a certain pace, they are free to move on to their next trend. In many cases in the past, we have actually seen mortgage rates move lower when central bank policy is tight or tight.
So again, the Only question: How good are long-term prices in the future at this time? Only unexpected changes in Outlook caused more extra speed in rates. Once that outlook is confirmed, rates will already be coming down again. Unfortunately, this is not something that will be relevant for a few weeks, a few months or so and will start throughout the year.