Feb 272018

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

For mortgage rates, the highlight of this week already has passed. It was the semi-annual testimony of the Fed Chair to Congress. This was Chairman Jerome Powell’s first experience at this dog-and-pony show, and he made it through mostly unscathed. Given the newness of his tenure, markets were watching carefully for anything that might suggest a change of course.

Unfortunately, Powell gave them something – probably unintentionally. He candidly stated that he thought the economy had strengthened since the Dec. That really shouldn’t be headline news, but markets interpreted his statement to mean the Fed is going to hike interest rates more than expected. Market rates immediately took off.

Was it a knee-jerk reaction? Probably. Rates recovered a little in the afternoon. Will we regain what we lost? Who knows? On the positive side, rates topped out at the top of their recent range before retreating a little. This gives us hope that markets have established a ceiling for now.

The rest of the week offers some more juicy economic data including 4th quarter GDP and consumer sentiment. However, I suspect rate movement is more likely to be dominated by end-of-month trade-flows, which can be unpredictable. If your rate isn’t locked, float cautiously. If rates break higher, I think we could lose another 1/8% fairly quickly.

Rate update: The case against higher interest rates

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Feb 212018

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By G. Steven Bray

Last week’s inflation report validated investors’ fears about inflation. It ticked up ever so slightly. Interest rates took notice and resumed their march higher.

Here’s what I find interesting about the recent rally in bond yields. The only thing that’s really changed in the last couple months, economically speaking, is the tax plan. While that may add to the Federal debt, we doubled the Federal debt over the last ten years, and markets seemed to shrug. I find it hard to believe they’ve suddenly found religion on the matter.

Some pundits also like to cite Trump’s infrastructure plan as ballooning the debt. It might or it might not, but right now it’s nothing more than policy position. I don’t think it can explain the big jump in rates.

So, that brings us back to inflation. Reported inflation did tick up, but the core rate still is under 2%. It’s likely the uptick is a result of a roughly 50% increase in the price of crude oil since last summer.

I’m not suggesting that you sit around waiting for rates to fall again. However, I am suggesting that the rise has more to do with market action than with economic fundamentals. If I’m correct, that at least gives us hope that the forces for higher rates will abate soon.

Rate update: Inflation: fear or reality?

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Feb 132018

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

After rising to the highest levels in over 4 years, interest rates are catching their breath, but I think it’s temporary. As we’ve discussed, the rapid rise seems to be predicated to a large extent on fears that inflation finally will come out of hibernation. Remember that inflation erodes the value of a currency. Thus, investors insist upon higher yields when they anticipate it.

I don’t think the fears are wholly irrational for reasons we’ve discussed, but the reality is we’ve seen very few signs of inflation so far. That could change tomorrow with the release of the Consumer Price Index. This isn’t the Fed’s preferred inflation metric, but being the granddaddy of inflation reports, it’s probably the one markets watch most keenly.

Unfortunately, I’m afraid the downside risk for this report is greater than the upside gain. By that, I mean if the reported value shows even a tenth of a percent increase, rates could quickly rise another 1/8%. If the reading is level or even slightly lower than last month, it should be positive for rates, but I don’t think they’re likely to fall very quickly. Markets seem convinced that inflation is out there hiding somewhere. I think it would take a few more months of continued tame inflation readings before markets will believe again that inflation is not a concern.

So, if you haven’t locked your interest rate, floating through tomorrow carries an outsized risk. If your outlook is a couple months into the future, there’s still hope. The longer inflation doesn’t materialize to validate market fears, the better the chances rates will find a ceiling and provide us with a bounce lower.

Rate update: The gift of volatility

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Feb 072018

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By G. Steven Bray

The stock market whipsaw has given mortgage rates a respite from their recent, dramatic rise, but I’m afraid the pause may be all too brief.

Interest rates have been on a tear of late rising a half percent in the last two months. Talking heads, who mostly ignored this until very recently, have been crawling all over each other trying to explain it. Their conclusion – it’s inflation. The only problem is economic reports still show inflation trending below the Fed’s target.

So, maybe it’s the expectations for future inflation. The problem with that is measures of inflation expectations have been rooted. The inflation component of inflation-adjusted Treasury rates rose a bit last fall (when we first started talking about inflation), but it really hasn’t changed in the last month.

So, maybe it’s just silly season stuff. If that’s true, then it’s quite possible the inflation hysteria will fade away over time, allowing rates to slowly trend back down.

So, how should you play this? If you need to close soon, I would favor locking your rate. This just doesn’t feel like the “big correction,” and I think rates still could go higher.

If your time horizon is a few months out, here’s what I would watch.

– The jobs report last Fri showed the highest wage growth since 2009. That’s great news, but the growth rate, 2.9%, matched expectations. Markets already should have accounted for it. However, watch this rate going forward. If it keeps rising, it could foretell rising inflation.

– The Fed has said it will raise short term rates 3 times this year. If the Fed signals a change of heart, it will affect interest rates.

– The Atlanta Fed shows 1st quarter GDP up over 5%. If this number holds, it could put pressure on the big Fed to change its rate hike plans.

– Finally, the Fed is buying fewer bonds, meaning other buyers will have to pick up the slack. So far, this seems to be affecting sentiment more than market demand. However, as the Fed continues to taper its buying, at some point it could put pressure on rates. Additionally, traders are convinced that central bankers worldwide are ready to follow the Fed’s lead. So far, bankers are denying it, but the eventual end of easy money will affect rates.

Rate update: Pick a bail-out point

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Jan 232018

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates are the highest they’ve been in about 9 months. That sounds alarming until you remember that we’re still only a percentage point away from the all-time low 30y rate. However, given that rates have been so low for so long, it’s rational to wonder if we’ve seen the end of historically low rates.

First, let’s look again at what seems to be driving the rate increase. The biggest source of inspiration is expectations – expectations for inflation and economic growth. Expectations influence the actions of bond investors. Those expectations started shifting last fall and became more positive with passage of tax reform. Markets expect US growth to accelerate this year, and given labor market conditions and recent corporate announcements of higher employee pay, it’s reasonable to conclude inflation may shift higher. As we know, inflation is the mortal enemy of low interest rates.

Rates also respond to supply and demand. As part of its quantitative easing program, the Federal Reserve has been the biggest buyer of mortgage bonds. Last fall, the Fed announced it would start tapering those purchases. It could take higher rates to entice other buyers to pick up the supply the Fed was buying.

All this makes it sound like higher rates are inevitable, and for the short term, that may be true. However, the Fed still is befuddled why inflation has been subdued for so long. A couple factors that have kept a lid on inflation, falling commodity prices and concerns about the global economy, could push rates lower again.

So, what to do if you need to lock your mortgage rate? Even when rates are in an uptrend, we often see temporary dips that are good locking opportunities, and we saw one today. Take advantage of a dip if you can, but pick your bail out point. If rates hit it, lock and cut your losses. I’m concerned that if rates start rising again this week, they won’t stop until they’re 1/4% to 3/8% higher.

Rate update: Why rates are heading higher

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Jan 162018

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By G. Steven Bray

Last week, I mentioned inflation being the underlying force behind mortgage rate increases. Last Fri’s Consumer Price Index release and a review of inflation expectations seem to confirm that.

The CPI ticked 0.1% higher in Dec, which matched expectations. That allowed the headline year-over-year rate to fall from 2.2% to 2.1%. However, the core rate, which strips out the volatile food and energy components, rose 0.3%, which was higher than expected, making the year-over-year increase 1.8%. This uptick in the core rate was unsettling and sparked a bit of bond selling, which pushed rates higher.

Inflation expectations, on the other hand, have remained well above 2% for quite a while even though actual inflation has rarely reached that level. Investors haven’t been accounting for those expectations until very recently as is reflected in inflation-adjusted bond prices.

I suspect the change in attitude is due to a number of factors. Markets aren’t sure what to expect from the incoming Fed chair. Will he wait to see whether the tax cuts accelerate the economy, or will he raise rates more aggressively to try to keep a lid on things? Certainly the tax cuts have raised consumer and investor sentiment, which suggests increased economic activity. In addition, oil prices have been a tear of late. Higher oil prices sparking higher overall inflation wouldn’t be a first.

While I’m not convinced we’ve seen the end of historically low mortgage rates, I do think we’re going to experience a period when the forces pushing rates up exceed those pushing down absent some unexpected event. For now, locking if rates dip for a day or two just makes sense.

Rate update: Looking for signs of inflation

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Jan 092018

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By G. Steven Bray

Mortgage rates have bounced up slightly since passage of the tax reform bill. While it’s not clear this was the cause, it’s evident tax reform has boosted sentiment as evidenced in the soaring stock market indices. What does that mean for rates going forward?

If tax reform was the only thing on market investors’ minds, it’s likely we wouldn’t be talking about a slight increase in rates. Notice that short-term interest rates have risen much more than long-term rates, resulting in a flattening Treasury yield curve. Something is keeping a lid on longer-term rates.

I suspect that something is inflation, which continues to post numbers below the Federal Reserve target of 2%. Markets watch several inflation measures, and all have been tame. The Fed’s favored measure, the PCE, remained at 1.5% last month. Wage inflation, as reported in last week’s jobs report, hit expectations at 2.5% after a downward revision to the previous month’s number. Consumer expectations for inflation remain historically low.

This week, we get what is probably the market’s favorite measure, the Consumer Price Index. While it has quirks that make it less valued by the Fed, it has great historical significance. The core CPI dropped back below 2% about a year ago and has been without a pulse since then. Should Friday’s report show that inflation ticked up, even by a modest amount, I expect rates to bounce higher again. If inflation remains dead, the bond market probably will continue to drift, looking for some other source of inspiration.

It’s all about the tax bill

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Dec 042017

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By G. Steven Bray

For the direction of mortgage rates, it’s mostly about the tax reform bill. When passage of the Senate version looked imminent, rates jumped up to the highest levels in a month. As we discussed last time, markets equate tax cuts with higher growth and potentially higher inflation, which correlate with higher interest rates.

It appears it will take a couple weeks for the House and Senate to reconcile their plans, and during that time, I don’t expect a lot of rate movement, absent a bombshell headline, even though this Fri we have the Nov jobs report and next week a Federal Reserve meeting. These are usually top tier events attracting the careful attention of investors. However, this month they’re liable to cause nary a stir.

The jobs report hasn’t seen much reaction from markets in months. It continues to show the economy plugging along. It would have to miss expectations badly to turn heads.

The Fed meeting has more potential because of the post meeting commentary. Markets are pricing in a nearly 100% chance of a rate hike, but investors think the tax cuts can negate any drag on the economy from higher rates. However, the commentary could shed more light on the Fed’s future plans or its thinking on inflation trends, either of which could move the market.

Rate update: Watch out for tax reform

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Nov 222017

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

It’s Thanksgiving week, and bond markets are pretty quiet. Rates are bouncing around in a very narrow range as they’re apt to do when everyone is full of turkey. However, that quiet may belie building pressure to move interest rates.

The biggest motivator of movement is the tax reform plan. As it sits now, markets seem cautiously optimistic that something will come of Congressional action. That optimism seems to have placed a floor under rates, but the caution is keeping them from moving much higher.

In simple terms, a large part of the tax plan is tax cuts. Tax cuts typically boost economic growth. Economic growth creates competition for goods (such as employees and raw materials), leading to higher prices for those goods. Higher prices, aka inflation, are the enemy of low interest rates.

At least that’s the way it seemed to work in the past. The world seems awash now in many raw materials, so higher growth might have a minimal impact on their prices. And the Philips Curve, which basically says low US unemployment should lead to higher wages, seems to have less relevance due in part to globalization.

That said, if the Senate next week seems to be coalescing around a tax plan, any tax plan, I expect rates will edge up a bit.

I wish you and your family a blessed Thanksgiving.

Rate update: rates caught in an updraft

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Nov 152017

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Did you catch the dip in mortgage rates last week? It was sweet while it lasted. Rates bumped back up at the end of the week.

If you didn’t catch it, let’s see what the crystal ball holds for rates going forward. Markets seem focused on two issues:

– The first is inflation. Despite the unprecedented efforts of the Federal Reserve, inflation has been virtually non-existent throughout this recovery. The Fed has a target rate of 2%, and the Fed’s favored measure, the PCE, hasn’t been that high in a long time.

This morning, we got the Oct Consumer Price Index. While this isn’t the one the Fed watches, it has historical significance, and markets pay attention. Several other inflation metrics recently have indicated budding pricing pressure, but the CPI remained pretty tame with core inflation still under 2%. So, while markets wait for the next inflation report, they’ll probably turn their full attention to the second issue.

– And that is tax reform. Given the current positive momentum, rates are feeling an updraft. Granted the House and Senate plans differ, but I don’t think markets are particularly concerned about which plan wins. They only care about the boost that lower tax rates will give the economy. And an economic boost should pressure interest rates higher.

Of course, one scary headline could quickly deflate this momentum. But absent that, I suggest you remain defensive for higher rates.