Bulls & Blogs

Rate update: It’s the government’s fault

Interest Rates, Residential Mortgage Comments Off

Mar 262020

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

By G. Steven Bray

Quite simply, mortgage rates are all over the place right now, and the market is a mess. Despite conspiracy theories you may be reading on social media, the government isn’t keeping rates artificially high to help Wall Street make a fat profit. In fact, it’s because of government involvement that rates are as low as they are.

Let’s take a short look back. It was only about 20 days ago that mortgage rates hit all time lows. Those lows lasted all of a couple hours one morning – and then rates started moving quickly higher. I discussed in my last blog some of the reasons that happened. In the simplest sense, it was due to basic economics. There were a LOT of mortgage bonds to sell due to the record low rates, and there were very few buyers of those bonds due to market turmoil surrounding the coronavirus. In order to clear the market, mortgage rates shot up over 5% in short order.

Since then, rates have been extremely volatile, falling back below 4% some days, then jumping back above 5%. But I said the government has been keeping rates low. How does that jive with the volatility?

Well, this weekend, the Federal Reserve basically wrote a blank check – indicating it would purchase an almost unlimited amount of mortgage bonds to restore liquidity to the market. That means markets can trade on the certainty that there will be a buyer for mortgage bonds. Now, that doesn’t guarantee low rates because the Fed is not setting the rates of the mortgages it buys. Instead, it allows the market to set rates knowing there will be a buyer.

The desired result – which I think we’re beginning to see – is more restrained volatility. Thirty-year rates were back below 4% the last couple days for most lenders, and despite continued volatility, have remained there.

Rate update: Why mortgage rates aren’t still at record lows

Interest Rates, Residential Mortgage 2 Responses »

Mar 162020

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

By G. Steven Bray

Over the weekend, the Federal Reserve cut the federal funds rate to zero, and it seems the whole world is asking today, “Where can I get that free money?” And, unfortunately, you can’t. The reasons are a little complex, but let’s see if we can break it down a little.

First, you have to realize that the federal funds rate, and in fact all the rates the Fed directly sets, are very short-term rates. Mortgage rates are long-term rates. They respond to different factors, and often move higher when the Fed rates are moving lower.

So, mortgage rates have been on a wild ride the last couple weeks with rates falling to record lows, then bouncing 25% higher in just one week. The reason they fell so quickly is the same as the reason the Fed acted this weekend: the pandemic is slowing our economy. But it looks like the virus is going to be with us for a while, so why didn’t rates remain at record lows? Let’s analyze the causes and predict what will happen over the coming weeks.

Mortgage rates are a reflection of the price investors are willing to pay for mortgage-backed securities – basically, your mortgage bundled with a bunch of others as an investment. That price is influenced by a number of factors. We discuss some of those factors regularly, such as expectations for economic growth and expectations of inflation. It’s economic growth expectations that caused rates to plummet a couple weeks ago.

But we had other negative factors come into play last week.

– One of those factors we call runoff. As we’ve discussed before, investors buy mortgage bonds expecting to earn interest over a number of years. When mortgages pay off early, such as through refinance, investors actually may lose money. In response, investors lower the price they’re willing to pay for mortgage securities, which results in higher rates.

– A second factor is basic economics: supply and demand. The drop in rates generated an enormous number of mortgage applications. We didn’t have enough investors to absorb all that supply. On top of that, investors didn’t seem to be the mood to buy much of anything last week as prices dropped in most markets.

– Finally, lenders’ systems were overwhelmed with the volume of new applications, and many of them raised their rates as a means of throttling that volume.

So, what’s next? While the federal funds rate announcement isn’t going to lead to lower rates, one of the Fed’s other actions may. The Fed is stepping into the market to buy a small amount of mortgage-backed securities. It appears this is returning liquidity to the market as rates have dropped a little today.

It probably will take a few weeks to dissipate the other negative factors, but I suspect the positive factors, slowing economy and negligible inflation, will still be in place. And once that happens, we could see record low mortgage rates again.

Rate update: Virus outbreak leads to lower mortgage rates

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Jan 282020

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

By G. Steven Bray

Tragedy can lead to uncertainty, and uncertainty is good for lower interest rates. The outbreak of the coronavirus in China has unsettled global markets, and investors are running to the safety of Treasury bonds. Investors are concerned the virus will seriously impact global growth. One analyst already is predicting the virus will shave 0.4% off global GDP, and the outbreak seems to be growing.

The effect on stock and Treasury bond prices has been much more significant than the effect on mortgage rates. Even so, mortgage rates are the lowest they’ve been in over 3 years.

If you’ve been watching for low interest rates, don’t procrastinate. As quickly as these rates have appeared they could evaporate. If the number of new cases of the virus starts to decline, markets may conclude the effects will be limited, and rates will snap back.

In that case, we’re back to watching economic data and events, which ramp up this week. The Federal Reserve meets today and tomorrow. While no one expects the Fed to change its current policy – no rate hikes or cuts until inflation or unemployment change significantly – investors love to parse the post-meeting statements for hidden meanings.

Next week we get the ISM reports and the Jan jobs report. The service sector of the economy has remained strong despite the trade disputes, but pundits have been predicting its deterioration for many months. Should the ISM report hint a downturn, rates could improve further. Likewise, should the jobs report deviate from its current trend, that could gets rates moving.

Rate update: Markets shrug off war drums

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Jan 082020

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By G. Steven Bray

When I predict whether rates will rise or fall, I always issue the caveat “absent unexpected headlines.” Well, the past few days have provided a case in point. Rates dropped quickly following the US drone strike last week on the Iranian general and rose just as quickly today following the President’s address that suggested the crisis has passed.

Where does that leave us? Rates are stuck in the range again and waiting for inspiration. Potential sources for that inspiration are many, but let’s focus on a few of them.

First and foremost, if the Iranians don’t “stand down” as the President suggests, rates are certain to fall again. Renewed hostilities will make investors more cautious, and that caution will lead to lower interest rates.

Assuming that doesn’t happen, and markets currently seem confident it won’t, the next big event is this week’s jobs report. Recession whisperers were headliners on cable news last fall when it appeared the jobs market was softening. That changed with Dec’s blowout jobs report. Markets expect another strong report this Fri. Because of this expectation, its verification is unlikely to change rates much. Should the report disappoint, rates should improve a little.

Trade is the other major source of inspiration. The Senate is expected to pass the new trade deal with Mexico and Canada soon, and the President said he expects to sign a Phase 1 deal with China mid-month. Markets widely expect this to happen, so when it does, it’s unlikely to change market sentiment. Rates seem to be experiencing some slight upward pressure, and that probably would continue. However, should we experience a hiccup in either deal, we’d likely see at least a short-term drop in rates.

Rate update: Trade deal blues

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Dec 132019

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By G. Steven Bray

In the last week, bond markets pretty much have confirmed that the only thing that matters is the trade dispute with China. Last Fri, we got a blowout jobs report. In previous times, rates might have jumped at least an eighth of a point in response. This time – nothing. Wed, Fed head Powell said the Federal Reserve won’t raise short-term rates unless inflation moves up significantly. Given that inflation seems mired below the Fed’s target rate, that comment should have caused jubilation in bond world leading to lower rates. Did it? Nope.

Now to be totally honest, both events did cause short term ripples within the markets, but rates never left their current range. It seems pretty obvious that traders are waiting for something before placing their bets on higher or lower rates.

That something is real factual news about the trade dispute. New tariffs are scheduled to begin this Sunday, and this time the tariffs target consumer products.

You can understand traders’ reluctance to pick a side. Many analysts believe the new tariffs, as proposed, will sap consumer demand. The American consumer has been the sustaining force in the economy this year. It doesn’t matter how good the economic data was last month. If the tariffs go into effect, it’s possible the data turns negative next month.

Now, it’s certain that the Trump Administration recognizes this. It’s also certain that the Chinese recognize the intense pain the tariffs could cause it’s already faltering economy. Thus, both sides have an incentive to announce a last minute reprieve, and it appears today they’ve done so. But the bigger question still remains: Will we get a trade deal?

Rate update: All I want for Christmas is a trade deal

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Dec 042019

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By G. Steven Bray

I hope you and your family had a blessed Thanksgiving. It was a fairly uneventful one for bond markets with interest rates sticking to their recent range. In fact, rates have been stuck in this range since Sep. Sure, rates move a little week to week in response to headlines and economic data, but I still think the next trend for rates ultimately depends on a trade deal with China, an imminent resolution to which is looking increasingly unlikely.

The main wildcard at this time is the global economy. Earlier in the year, rates dipped invitingly based on weak economic data coming out of Europe and China. There was great concern that the US economy would follow suit. Instead, the US economy, except for manufacturing, showed resillence and even robustness in sectors such as housing. Europe and China now seem to be bottoming out, and some analysts are predicting renewed global growth next year.

As we’ve discussed many times, a growing economy tends to push up interest rates, so that’s the background through which we have to consider our current situation. A trade deal, even a partial one, is likely to foster renewed optimism and, in turn, economic growth. On the other hand, should the trade dispute deepen, it’s likely the hand-wringing and talk of recession will start again. While that’s good for lower interest rates, we risk talking ourselves into a recession regardless of the strength of our economy.

Rate update: Reasons rate should be lower

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Sep 162019

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

By G. Steven Bray

What a difference a couple weeks make. Last week, the press was reporting the lowest mortgage rates since 2016. This week? Well, we lost a little ground. Rates rose about half a point in two weeks.

So, if you approach decisions cautiously (like I do) and didn’t jump into a refinance, are you out of luck? I think not, but you may have to practice a bit of patience. Last week’s bounce higher may have been nothing more than a market reaction to the rapidity with which rates fell at the end of Aug.

Recall back to earlier posts when we discussed the reasons rates were falling: Europe appears headed for a recession, Brexit remains unresolved, and China’s economy is slowing dramatically due to the ongoing trade dispute. On top of that, talking heads have spent the summer trying to talk the US economy into a recession. Little has changed to mitigate those concerns.

Given that, I think it’s likely rates will ooze back down again. The question is when. Here’s what I’m watching:

The Federal Reserve meets this week, and pretty much everyone expects it to cut short term rates by a quarter point. That’s already priced into rates. What I’ll be watching is what the Fed puts in its post-meeting announcement and what Fed head Powell says at his press conference. If the Fed doesn’t acknowledge ongoing risks to the economy, rates will remain elevated longer.
Second, US manufacturing data has been soft, but consumer data has remained strong. If consumers stop spending money, the US economy will be headed for a soft patch, and that will move rates lower.
Finally, the trade war with China is hurting both countries, but it seems to be hurting China more. That may be softening China’s resistance to compromising on some of the thornier issues. A complete resolution seems unlikely anytime soon, but a thawing of positions might give markets confidence in the US economy and keep rates higher.

Rate update: Thank cheap Chinese imports for lower rates

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Aug 052019

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By G. Steven Bray

If you needed a recipe for a rate rally, just take a look at recent financial headlines. Friday, the President announced a tariff on an additional $300B worth of Chinese imports, and the investor herd started making flight-to-safety trades, buying up US bonds. When the demand for bonds is high, rates are low (because the bond issuers don’t have to offer as much interest to entice bond purchases).

Almost lost in the stampede was last Wed’s Fed rate cut and the good jobs report on Fri. Without the stampede, I’d hazard that we’d be stuck in the summer doldrums again, wondering when rates would move higher or lower. Fed head Powell hemmed and hawed when asked if the Fed would cut rates again this year, and the jobs report was strong enough to suggest a continuation of moderate economic growth. Neither provided a clear signal to investors.

But investors got their signal Fri and believe it was reinforced by weak global economic data today. On top of that, China devalued it currency overnight to levels not seen since the depths of the Great Recession.

That matters because it suggests a number of rate friendly effects. It suggests the trade war isn’t going to end soon. By devaluing its currency, China hopes to keep its good competitive despite the tariffs. Lower import prices lead to lower inflation, the mortal enemy of interest rates. And it increases the chances of a recession, and that increases the chances the Fed will have to lower short term rates even further.

As usually happens when Treasury rates fall so quickly, only a fraction of the gain has filtered through to mortgage rates. However, if Treasury rates remain in this new, lower range, mortgage rates eventually will catch up.

Rate update: What Fed’s Powell says is important

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Jul 302019

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By G. Steven Bray

This is a big week for interest rates. Not only do we have a lot of important economic reports, but the Federal Reserve is expected to announce it’s reducing short term interest rates by a quarter point. The Fed has been telegraphing the rate cut for weeks, so that really shouldn’t garner much attention. Instead, markets are going to be watching what Fed head Powell says in the post-meeting press conference.

Markets WANT the Fed to continue cutting rates at subsequent meetings this year, and the Fed’s forward guidance has indicated a willingness to do so – if economic conditions warrant it. So, I’m sure Powell will get peppered with questions trying to pin him down on that question. If he pulls back on future rate cuts, mortgage rates are likely to jump. Personally, I think he’ll thread the needle, showing a willingness to cut further, but saying the timing depends on economic data.

If that happens, markets will turn their attention to Friday’s jobs report. Last month’s report rebounded strongly from relatively weak May numbers. July’s economic data has been somewhat mixed, but generally positive. Consumer spending has buoyed the economy, making up for a slowdown in the manufacturing sector.

The problem is that the latter is more likely to be affected by slowing economies overseas. Thus, another strong jobs report still might not sway markets (or the Fed) from anticipating lower rates in the months to come, which probably would leave rates in their current range. On the other hand, if job growth shows a weakening trend, I suspect interest rates will follow that trend lower.

Rate update: Choppy waters ahead

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Jul 162019

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

By G. Steven Bray

Following the surprisingly strong jobs report at the beginning of the month, mortgage rates have started edging up again – but without conviction. Rates are being affected by several factors right now, and those factors seem fairly balanced.

On the one hand, we have deteriorating economic conditions in Europe and China worrying investors of a global economic slowdown, which would push rates down. The Federal Reserve has acknowledged this ‘fear factor,’ which made markets very happy a couple weeks ago and supported lower rates.

On the other hand, US economic conditions remain healthy, as evidenced by the strong Jun jobs report earlier this month and today’s very strong retail sales report. On top of that, the inflation report last week came in a tad higher than expected, and inflation is the big enemy of low interest rates.

I expect rates to remain choppy and noncommittal until the end of the month when the Fed meets again. Based on Fed head Powell’s Congressional testimony last week, markets fully expect the Fed to cut short term rates by 25 bp at that meeting, so that action probably won’t move the needle. However, if the Fed fails to cut rates or cuts more than expected, watch out. And we’ll talk about those possibilities in the upcoming weeks.

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