Mortgage rates hit a new high in 2022 in bond market sell-offs
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After deciding to raise interest rates on Wednesday, investors lost appetite for bonds on Thursday in a sell-off that pushed mortgage rates to new highs in 2022.
Bond markets regained ground on Friday, as 10-year Treasury yields, a measure of mortgage rates, fell from 3.77 percent. Strong investor demand for bonds and mortgage-backed securities is driving up their prices and lowering yields.
But Friday’s renewed demand for bonds could be short-lived, if prompted by a temporary trip to safety by investors. Richard Fisher, the former president of the Federal Reserve Bank of Dallas, told CNBC that he expects 10-year bond yields to reach 4% by the end of the year.
Stocks fell on Friday amid concerns that as the war in Ukraine continues, continued moves by the Federal Reserve and other central banks to raise short-term interest rates to combat inflation will eventually lead to a recession.
“The market thinks the economy will slow faster than the Fed,” said Mark Cabana, head of US interest rate strategy at Bank of America. The New York Times.
Mortgage rates reached their highest level in 2022
Blue Mortgage Optimum Market Indicators, which are updated daily, showed rates for 30-year fixed-rate mortgages to hit a new high in 2022 at 6.4 percent on Thursday.
While interest rates on 30-year fixed-rate mortgages rose to more than 6 percent in June on similar concerns, by August 1, they had fallen to 5.26 percent, as investors bet in mortgage-backed securities that inflation would decline. And the Federal Reserve will slow down the rate hike.
But mortgage rates and Treasury yields have been on the rise since August 1, as Fed policymakers continued to telegraph their intention to fight inflation “hard,” even if it causes “some pain to households and businesses.”
At the conclusion of their last two-day meeting this week, Fed policymakers made clear that they are ready to continue raising the short-term federal funds rate to reach the 4.4 percent target by the end of this year, and keep rates high. until inflation goes down.
Economists at Fannie Mae expect a fourth hike of 75 basis points in November, and a 50 basis point hike in December, to reach the target for the federal funds rate.
“This is higher than our latest rate forecast, although we have long predicted that the Federal Reserve will need to tighten monetary policy aggressively to combat inflation, potentially causing the economy to fall into recession in 2023.” Economist Nathaniel Drake said in a note on Friday.
While the Treasury and mortgage debt markets took the news wide on Wednesday, a massive sell-off in the bond markets led to higher Treasury yields and mortgage rates on Thursday.
While central banks in Britain, Sweden, Switzerland and Norway also raised interest rates, “it was the Fed’s signal that it expects interest rates to continue to rise in the US through 2023 that triggered the recent sell-off.” Reuters mentioned.
At a press conference on Wednesday, Federal Reserve Chairman Jerome Powell appeared intent on calming speculation that the Fed would ease interest rates anytime soon, noting that the Fed does not see inflation falling back to the Fed’s 2 percent target through 2025. .
“So far there is only modest evidence that the labor market is cooling off,” Powell said. “Employment is a bit low. Quitting all-time highs. There are signs that wage measures may be easing. Payroll gains have slipped, but not by much.”
In a note to clients on Friday, Pantheon’s chief economist, Ian Shepherdson, said his company’s forecast “indicates that the economy will not plunge into a recession.”
But Shepherdson said the fact remains “that the Fed clearly wants the labor market to weaken sharply. What is not clear to us is why. We believe inflation will decline over the next year as margins re-compress, following the rapid normalization of supply chains, to The point at which the deficit in spending on basic personal consumption [personal consumption expenditures] Inflation next summer is a real possibility.”
Rates are not expected to ease
Source: Fannie Mae Housing Outlook.
Economists at Fannie Mae take on the Fed for what it said is not backing down from tightening monetary policy.
In their August forecast, economists at Fannie Mae projected that 30-year fixed-mortgage rates would likely peak during the second quarter at 5.2 percent, and would decline for five consecutive quarters to an average of 4.4 percent during the second half of 2023.
But in their September outlook, Fannie Mae economists said they now see mortgage rates peak at 5.7 percent during the last quarter of this year and the first quarter of 2023, before easing back slightly to 5.5 percent by the final three months of next year.
If there’s one positive aspect for mortgage rates to come out of this week’s Federal Reserve meeting, it’s that Powell said there are no plans to accelerate “quantitative tightening” to shrink the central bank’s nearly $9 trillion balance sheet.
Federal Reserve Balance Sheet
The assets held by the Federal Reserve through quantitative easing purchases now include $5.67 trillion in long-term Treasuries and $2.71 trillion in mortgage-backed securities. Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis.
The Fed currently clears $60 billion in Treasurys and $35 billion in mortgage debt each month by allowing expired assets to roll in. In the past, Fed policymakers have said they would also consider selling Treasuries and mortgage debt if needed to speed up tightening, which would put further upward pressure on mortgage rates.
“It’s not something we’re thinking about right now and it’s not something I expect us to think about in the near term,” Powell said on Wednesday. “It is something we will resort to, but the time to resort to it is not near.”
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