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Interest Rate Outlook - Three Things to Follow

October 12, 2020

Last Week in Review: Interest Rate Outlook - Three Things to Follow

Three Things to Follow
Home loan rates remain right at historic lows fueling unprecedented refinance activity and driving purchase demand. Many are asking: how long will the good times last? Could rates move another leg lower? What's next for rates?
Here are three things to follow:
1) Don't Fight the Fed
The Federal Reserve, under the leadership of Chairman Jerome Powell, has been a main driver of low home loan rates. In addition to holding the overnight Fed Funds Rate at 0% for what is likely a couple of years, the Fed continues to purchase both Treasury and mortgage-backed securities to the tune of $120 billion per month.
The Fed deserves all of the credit for stabilizing the Mortgage Bond market when COVID-19 hit and for their continued buying support which has pushed home loan rates to historic lows.
The good news for rates is that the Fed recently said, if necessary, that they would purchase even more Bonds to help pin down home loan rates to support the economic recovery.
2) More Fiscal Stimulus on the Way
This past week, President Trump called off negotiations for a larger stimulus bill until after the election and asked Congress to agree on a "targeted" stimulus package to help airlines, restore PPP, direct checks, and more. At the moment, there is hope and speculation of a "slimmer" stimulus package.
One way or another, we should expect more stimulus and likely a lot more depending on who wins the election and what Congress will look like.
Fiscal stimulus, and a lot of it, may be too much of a good thing and actually pressure home loan rates higher over time. How?

  • The Treasury will have to sell even more notes and Bonds at auction to pay for the additional stimulus. Currently, home loan rates and Treasury price gains have been capped due to the already overwhelming supply of Treasuries being sold at auction each week. Adding more supply through more stimulus will put further upward pressure on rates.
  • More stimulus elevates inflation expectations. Inflation is the archenemy of interest rates. If inflation rises, rates rise.
  • Stimulus is an aid to the economy. It will help economic growth in many ways, which is good news. Bonds and rates don't like good news.

3) Back to the 80s
Watch .79% on the 10-year Note yield as it traded near that level this past week. This is a key resistance level that has kept a lid on rates. We have only seen the yield close at or above .79% four times since March.
If the 10-year yield moves up and into the .80%s, mortgage-backed securities will likely be pressured lower, with home loan rates moving higher.
Bottom line: Rates are at all-time lows and may not be here for long.


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