Yellen for More Stimulus

January 25, 2021jordanreedNews

Last Week in Review: Yellen for More Stimulus

This past week, we watched stocks soar to record highs as Treasury Secretary nominee, Janet Yellen’s Senate confirmation began. Ms. Yellen is being embraced by the stock markets because:

  1. She is well known, having been Fed Chair for several years.
  2. Having been Fed Chair, she knows the inner workings of the Fed. This will help on the stimulus front.
  3. Speaking of stimulus, she is very dovish, as evidenced by her “act big” comment regarding an enormous stimulus package.

What do rates think of “acting big?”

Mortgage-backed security (MBS) prices have been unable to push higher, leaving home loan rates elevated on the year. The 10-year yield, a proxy for long-term rates in the U.S., is seeing its yield at 1.11%, also elevated on the year.

Stimulus does three things MBS and long-term bonds don’t like:

  1. It increases bond issuance, which must get sold into the market. The additional issuance to pay for previous stimulus measures is one reason why yields are creeping higher. More stimulus means more bonds, weight on price, and upwards pressure on rates.
  2. It lifts inflation expectations. MBS prices are the instrument that provides mortgage rates, and market forces/inflation are the main drivers. If inflation goes up, rates go up and vice versa.
  3. It helps revive and stimulate the economy. This is good news, and bonds generally hate good news.

Fed Safety Net

At the moment, the Fed continues to purchase $120B in Treasurys and MBS each month to help pin down long-term rates. Should rates continue to tick up, there will be a point where the Fed would likely jump back into the market and do more by purchasing more MBS and Treasurys to keep rates from rising. If this sounds like the Fed is keeping rates artificially low, they are. They also recently said they will buy “at least” $120B each month, so the door is open to do more if called upon.

Bottom line: With only a couple weeks into 2021, we are already seeing a shift towards slightly higher rates. 

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