Mortgage Rates Move Higher After Fed Rate Hike, But Not Because of It

By: Matthew Graham

Nov 2, 2022

The Federal Reserve hiked rates by 0.75% today and 30yr fixed mortgage rates moved moderately higher.  Interestingly enough, those two things are fairly unrelated.

The Fed Funds Rate (the thing the Fed “hikes” when you hear about the Fed hiking rates) applies to overnight loans among large financial institutions.  It’s important, to be sure, but it only changes 8 times a year whereas securities in the bond market change every second of the day.

There are all kinds of bonds.  US Treasuries are the quintessential example.  The yield on a 10yr US Treasury is the most popular benchmark for longer-term interest rates in the world.  There are bonds that underlie the mortgage market as well (MBS or mortgage-backed-securities).  They tend to move a lot like US Treasuries.  There are even bonds that traders use to bet on the future level of the Fed Funds Rate.

With that in mind, the bond market has LONG since assumed the Fed would hike 0.75% today and when the 0.75% hike actually happened, it didn’t have any impact on the rest of the bond market.  In fact, Treasuries and MBS actually IMPROVED at first.

The improvements were due to a change in the verbiage of the Fed’s policy statement.  Traders were hoping to get some indication that the Fed was getting close to having a discussion about slowing the pace of rate hikes.  While it was very carefully worded, today’s announcement arguably provided such a hint.  Unfortunately, that wasn’t the last thing the Fed had to say today.

In addition to the statement itself, there’s also a press conference held by Fed Chair Powell.  While he confirmed that the Fed would be discussing the pace of rate hikes the next time the Fed meets (in December), he said a lot more to remind markets about how persistent inflation has been, and why that means the Fed’s rate hike outlook will likely be even higher in December than it was in September (the last time they released rate forecasts).

Both stocks and bonds sold off on that news (when bonds sell, it implies higher rates, all other things being equal).  Most mortgage lenders issued mid-day rate increases.  The change wasn’t extreme in the context of other recent moves, but it was nonetheless not what anyone was hoping to see after the coast looked to be clear after the initial policy announcement.

Today’s volatility aside, the more important events for bonds/rates are yet to come.  The Fed, after all, is only responding to changes in economic data when deciding on its rate hike pace.  If Friday’s jobs report shows higher unemployment or of next week’s CPI data shows lower inflation, rates could easily find their footing and move lower.  Unfortunately, the data can cut both ways (i.e. if it’s stronger than expected, rates would likely move higher).

By: Matthew Graham

Mon, Sep 26 2022, 4:52 PM

The most recent historical high water market for mortgage rates was “14 years.”  It was broken so many times in September that we officially declared it to be boring last Tuesday.  Now, less than a week later, 14-year highs would be more exciting than boring.  As of mid-day today, we’re officially at 20 year highs.

Perhaps it should be “unofficial,” because our daily rate records only go back to the beginning of 2009.  We’re relying on weekly survey data for the historic highs and it’s entirely possible that there was a day or two in 2008 where rates were higher than today, but we digress.  Comparing current rate levels to various points in the past isn’t really important.

What’s important is that in less than a year, the payment on a new $400k mortgage is up at least $1000/month.  Many lenders are now quoting top tier 30yr fixed rates over 7%.

Why have rates spiked so quickly?  One might assume is has something to do with last week’s Fed rate hike.  After all, the Fed hiked rates and then mortgage rates went higher, but that’s actually not the issue at the moment.

The issue stems from strange goings-on in the realm of fiscal policy in The UK.  Yes, that’s an odd thing to consider when it comes to mortgage rates in the US, but it’s important to understand just how huge the market reaction to recent events in The UK has been.  Without going into tedious detail, the best way to convey the drama is by noting that British 10yr yields have risen more than 1.00% in 4 business days.

Contrast that to US 10yr yields which have only jumped by about a third of that.  Also consider that “a third” is a smaller than normal correlation for these two markets.

In other words, the market movement overseas is so big that, even with a far diminished echo, it’s been enough for another major jump in rates.

Don’t expect any emergency help from the Fed either.  Multiple Fed speakers were out today reiterating that they’re still waiting for evidence that inflation has turned a corner and for evidence that their policies are producing a certain amount of economic pain.  Pain is normally bad, but in this case, the Fed views it as evidence of traction in the fight against inflation.  In any event, at best, it will take weeks and probably months for economic data to open the door for a softer stance from the Fed.

Bottom line: 7% or close to it is the new 30yr fixed rate reality for now.

Rates Jump a Quarter Point Instantly After Key Inflation Report; Now Back to 14-Year Highs

By: Matthew Graham

Mortgage rates were already in the vicinity of the highest levels in 14 years.  With large day-to-day swings being extremely common these days, we were only ever one bad day away from making it back to those highs.  Today was one of those days!

The culprit was at least well known and well understood, both before and after it had its impact on rates.  This morning brought the scheduled release of August’s Consumer Price Index (CPI), a key inflation report that has proven to have more power than any other inflation metric when it comes to creating volatility in rates.

In other words, we already knew that rates would be headed higher if today’s inflation data came out higher than expected, and that’s exactly what happened.  In fact, the actual number beat forecasts by much more than the normal gap between reality and forecasts.  It’s common to see a deviation of 0.1-0.2%, but today’s was 0.3%.

Bonds dislike inflation for a variety of reasons. There are broad, practical reasons involving the impact inflation has on bondholders’ returns, but there are also timely, tactical reasons.  The latter is a reference to next week’s Fed announcement.  The Fed’s job is to fight inflation and one of the ways it does that is to hike its policy rate.

The Fed Funds Rate isn’t the same as a mortgage rate, but higher Fed Funds Rate expectations tend to push mortgage rates higher.  Bottom line: markets now expect the Fed to discuss an even bigger rate hike next week and the bond market is pricing in that possibility today.

The average mortgage lender is back up into the lower 6’s for conventional 30yr fixed loans.  Quotes vary widely depending on the scenario and the presence of upfront costs and discount points.  It continues to be the case that many loans require more upfront cost than is historically normal due to the current landscape of mortgage bond pricing.

By: Matthew Graham

It’s certainly already been an interesting year for financial markets–especially for housing and interest rates. But most of what’s happened over the past 8 months could be thought of as the more predictable phase of the post-pandemic market cycle. It’s what happens next that’ll be more interesting.

How could anyone say that the last 8 months have been predictable when rates have risen at the fastest pace in decades to the highest levels in more than 14 years?  It’s true, the pace and the outright levels defied most predictions.  But the predictable phenomenon was more of a general truth that we knew we’d contend with in late 2021.  Here it is in a nutshell:

The Fed shifted gears on bond buying in late 2021, announcing a gradual wind-down of new bond purchases to be followed by a series of rate hikes.  This shift from the Fed was always likely to coincide with rising rates and lower stock prices.  The only uncertainty was the size, speed, and staying power of the shift as the Fed attempted to strike a balance between combatting inflation without crippling the economy.

June’s reading of the Consumer Price Index (CPI, a key government inflation report) was the only major curve ball of the year–generally thought to be a byproduct of the Ukraine War’s effect on commodities prices.  It made for a rapid reassessment of the Fed’s rate hike outlook as seen in the chart below.

The blue line is the market’s expectation of the Fed Funds Rate after the September meeting.  Note the big leap in June.  To be fair, July’s inflation report caused another jump, but it fell back quickly to the previous 2.875% range and has been there ever since.

Longer term rate expectations (for the December meeting as well as next June’s meeting) have had more ebbs and flows due to the shift in the economic outlook.  Weaker economy = lower long-term rates, all other things being equal.  These longer-term expectations share more similarities with longer-term rates like those for mortgages.

Rates recovered nicely in July as markets feared recession, but rebounded sharply in August as data suggested a much more resilient economy.  This was especially true of the jobs report in early August as well as the ISM Purchasing Managers Indices (PMIs) which are like more timely, more highly regarded versions of GDP broken out by manufacturing and non-manufacturing sectors.

PMI data has been responsible for several noticeable jumps toward higher rates over the past month.  The same was true this week when the non-manufacturing (or simply “services”) version came out on Tuesday morning. The services PMI was expected to move DOWN to 55.1, but instead moved UP to 56.9, effectively keeping it in “strong” historical territory whereas the market thought it was trending back down to the “moderate” level.

That’s all just a fancy way of saying that, despite GDP numbers being in negative territory, and despite aggressive Fed rate hikes, other economic indicators suggest the economy continues to expand.  The PMI data helped push US rates higher at a faster pace than overseas rates as US traders returned from the 3-day weekend, but European rates took the lead on Thursday after the European Central Bank hiked rates and warned about upside risks to the inflation outlook.

While US economic data is certainly responsible for a good amount of upward pressure in rates recently, Europe and European Central Bank policies have been adding fuel to the fire.  This can be seen in the faster rise in EU bond yields. Incidentally, the initial jump in the blue line (US 10yr) in early August coincided with several strong economic reports in the US: ISM PMIs and the Jobs Report.

Long story short, rates have topped out twice and the market knows what it looks like to see high rates in conjunction with a strong economy.  The bigger question is the extent to which inflation is calming down.  After all, inflation is the reason the Fed continues to say it’s willing to attempt to restrain economic activity via rate hikes.  Looking at the year-over-year chart, it looks like we have a long way to go for the Fed to get core inflation back down to its target.

But year-over-year data is just that.  It includes the past 12 months–many of which contribute a massive amount to a total that will inevitably be much smaller even if the economy simply maintains the current monthly pace of inflation.  In fact, core inflation only needs to move down 0.1% in the next report to put year-over-year numbers on pace to hit the target range.  Once the Fed is reasonably sure that’s happening, it can begin to consider a friendlier shift in the monetary policy that has recently put so much upward pressure on rates.

And that brings us to why things are about to get interesting.  Summer is unofficially over.  School is back in session.  Traders are back at their desks.  And next week brings the next installment of the CPI data.  6 short business days later, we’ll get the next Fed policy announcement as well as an updated rate hike projection from each Fed member.

All of the above is made all the more interesting due to the fact that the Fed–by its own admission–has no idea how much it will hike rates in 2 weeks, and that it will only be able to decide after it sees economic data.  Given that CPI is by far and away the most relevant piece of economic data between now and then AND that the Fed has a policy of abstaining from public comment starting 11 days before a meeting (aka today was the last day of Fed comments until 9/21), the market’s reaction to next Tuesday’s CPI data could be tremendously interesting indeed.