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Taxes, Taper, and a Technical Breakout

September 20, 2021jordanreedNews

Home loan rates were mainly unchanged this past week. Let’s break down what is threatening the financial markets and rates.

The Taper Threat

A big threat to stocks, bonds, and rates is when the Fed will announce a tapering or scaling back of bond purchases. Presently the Fed has been buying at least $120B worth of Treasuries and mortgage-backed securities (MBSs) every month. This Fed buying is the main reason why home loan rates remain near all-time lows.

With inflation elevated and froth in the housing market, there is growing pressure on the Fed to start buying fewer bonds – and there is speculation the Fed will start tapering by purchasing fewer MBSs.

No one knows what, if and when the Fed will do anything, but if the Fed buys fewer MBSs, home loan rates will likely move higher. Back in 2013, when the Fed mentioned the word “taper” home loan rates shot up 2.5% over the next 6 months. The Fed knows this and is trying to scale back purchases without causing a similar disruption.

The next Fed Meeting Monetary Policy Statement will be released on Wednesday, Sept 22nd at 2:00 p.m. ET. We will find out soon enough if the Fed is confident enough to scale back bond purchases and not trigger a taper tantrum reaction in the bond market as we saw back in 2013.

The Tax Threat

The Administration and Congress are trying to pass a $3.5T spending plan that will include various tax hikes. There is a concern in the financial markets that a broad range of tax hikes could lead to slower economic growth, at a time when economic growth is already decelerating. Stocks don’t like the idea of slower growth and have been under selling pressure of late as details of the $3.5T plan have emerged.

Normally bonds and rates would do well when stocks suffer. But that has not happened this past week. Bonds are worried about the taper threat and the idea that a large $3.5T plan could put upward pressure on rates as the bond market has to absorb all the new bond issuance required to fund the enormous spending plan.

Much like the taper threat, no one knows how big the spending plan will ultimately be and what taxes will be included. Once something is close to being passed, stocks, bonds, and rates will react accordingly.

Bottom line: We do not know if the Fed will also announce a “modest” tapering in bond purchases next week or how the bond market will react. At some point, the Fed will have to scale back purchases and when it does, we should expect an increase in rates.

ECB Scales Back, No Tantrum – Yet

September 13, 2021jordanreedNews

Last Week in Review: ECB Scales Back, No Tantrum – Yet.

Home loan rates have bounced around the past couple of weeks in response to good, bad, and even some ugly news. Let’s break down last week’s big news and what it means to the housing market and economy.

The European Central Bank (ECB) Buying Fewer Bonds

Last Thursday, the ECB announced it is going to “modestly” reduce the pace of their pandemic emergency purchase program (PEPP) bond purchases.

The PEPP, which started in March 2020, will end next March with bond purchases totaling 1.87B euros.

“The Lady isn’t tapering” – ECB President Christine Lagarde 9/9/21

It is worth noting, the existing Asset Purchase Program (APP) that purchases 20B euros in bonds per month will continue and, this taper announcement does not signal an interest rate liftoff.

In response to the well-telegraphed ECB action, bond yields in Europe were mostly unchanged which helped U.S. interest rates remain near unchanged.

This big question: Will the Federal Reserve taper bond purchases here at home?

It is not uncommon for central banks to work in unison with monetary policy, meaning now that the ECB has dipped its toe in the water to slow bond purchases, maybe the Fed can do the same.

There have been many calls to taper the mortgage-backed security (MBS) side of the purchases due to the “froth” in the housing market.

However, we are seeing incredible slack in the labor market while consumer confidence and sentiment have declined as COVID remains a threat to economic progress.

The next Fed Meeting Monetary Policy Statement will be released on Wednesday, Sept 22nd at 2:00 p.m. ET. We will find out soon enough if the Fed is confident enough to scale back bond purchases and not trigger a taper tantrum reaction in the bond market as we saw back in 2013.

Bottom line: We do not know if the Fed will also announce a “modest” tapering in bond purchases or how the bond market will react. At some point, the Fed will have to scale back purchases and when it does, we should expect an increase in rates.

Congress Printing, Fed Exiting

August 30, 2021jordanreedNews

Last Week in Review: Congress Printing, Fed Exiting

Among the many stories happening this past week, the elephant in the room remains Afghanistan. There is so much uncertainty and it isn’t clear when, how and if it ends. In challenging times like these, bond prices and rates typically improve, but they didn’t. Rates crept higher week over week. Let’s break it all down and discuss what to look for next week.

Cranking up the Printing Press

Congress is preparing to vote on nearly $5T on spending next year. That is a serious amount of money, and it comes with a cost. First, the Treasury must sell bonds in weekly auctions in order to create the money to spend.

This means we need buyers, and a lot of them to purchase all this paper. These buyers must also be confident that the bonds don’t decline in value causing a capital loss sometime in the future.

What would cause bond prices to decline and rates to move higher? Here are a few things that could cause higher rates:

Persistently high inflation: At the moment, we are seeing very high year-over-year inflation, but the Fed says it will be mostly “transitory” or temporary in nature. If the Fed is incorrect and inflation remains persistently high, rates must creep higher. The Consumer Price Index, CPI, is currently 5.3% annually, more than three times higher than our 10-year yield, currently sitting at 1.35%. Inflation being higher than Treasury rates is an unsustainable trend but, there is a big reason why it exists today.

The Fed stops buying bonds: The Fed is currently purchasing at least $120B in Treasuries and Mortgage-backed securities every month. There are calls to taper and stop purchasing bonds. If and when the Fed exits, rates could move sharply higher, much like they did back in 2013 – hence the term “taper tantrum”.

U.S. Dollar decline: Should the enormous spending plan be passed; it could have a negative effect on the US Dollar. When the dollar declines, it makes US dollar denominated commodities like Oil more expensive, thereby lifting prices and causing inflation.

Bottom line: There is a lot of uncertainty in Afghanistan, Washington DC and the Fed. We don’t know if these spending bills will even pass or if conditions warrant the Fed to taper anytime soon. However, if and when the Fed signals they are exiting their bond buying program, rates are likely headed higher and possibly in a hurry.

Taste of Taper Tantrum

August 16, 2021jordanreedNews

Last Week in Review: Taste of Taper Tantrum

Home loan rates have crept higher over the last couple of weeks on fears the Fed may taper their bond purchasing program sooner, rather than later. Until now, housing, interest rates, and the financial markets have enjoyed the benefits of the Fed monetary policy and the bond-buying program. Let’s break down what has happened of late in this mini-bond market taper tantrum and what it means for you.

To Taper or Not to Taper

There is increasing pressure for the Federal Reserve to taper their bond purchasing program.

The Fed has a dual mandate of promoting maximum employment and maintaining price stability. On the employment side of the mandate, the labor market recovery is uneven. Yes, the headline unemployment number fell to 5.4% last Friday, but the Labor Force Participation Rate (LFPR) remains at stubbornly low levels. The LFPR measures how many people are actively working or searching for a job, hence they are “participating.” Moreover, there are over 10M available jobs in the U.S., a record high.

So, while the headline unemployment number looks low, the high amount of people not participating, and a record number of help-wanted signs posted remain a concern. It may be enough reason for the Fed to not taper just yet.

On the inflation portion of the Fed’s mandate, the consumer price index was reported on Wednesday and the reading came in a little less hot than feared, which was a good thing for the bond market. The Fed has been saying that high inflation would be transitory or short-lived, so seeing a retreat in prices would be another reason for the Fed not to taper just yet.

But then there’s housing. Home prices have skyrocketed year over year in response to soaring lumber prices, commodity prices, and scorching demand. This has caused housing affordability problems for many. One way many suggest cooling off the housing froth is for the Fed to taper their Mortgage-Backed-Security (MBS) purchases. It’s these purchases that directly affect home loan rates and is a major reason why a thirty-year mortgage continues to hover near 3% – for without the Fed buying over $50B of MBS per month, of late, home loan rates would be much higher.

Bracing for Jackson Hole

Many suspect the Fed will announce their intentions to taper MBS purchases at the Jackson Hole Symposium, August 26 through 28th. No one knows if the Fed will make that signal or if they will wait and hide behind some of the weak labor market components and cooler inflation.

Bottom line: For anyone considering a mortgage, either refinance or purchase, now is the time. The increase in rates we have seen over the past couple of weeks is just a taste of what higher rates would look like if the Fed were to signal their intention to taper MBS purchases.

Three Things Moving the Markets

August 9, 2021jordanreedNews

Last Week in Review: Three Things Moving the Markets

This past week long-term interest rates dropped to the lowest levels in six months but things changed in a “New York Minute”. Let’s break down three things that moved the markets and what to look for in the week ahead.

1: “The path of the economy depends on the course of the virus.” – Fed Statement.

COVID continues to linger causing disruption and restrictions in economic activity. The stall in vaccinations and uncertainty surrounding the Delta and Delta Plus variant has been enough to cause investors to flee into the safe-haven of the U.S. Dollar and U.S. Dollar-denominated assets like Treasury and Mortgage-backed securities (MBS). Note, the 10-year Note yield has been seeing outsized rate improvement versus mortgage rates…this as the safe-haven trade typically sees more money flow into Treasuries than any other asset. So, while mortgage rates did improve week over week, they did not improve like the 10-year yield, which dropped sharply to 1.12% midweek.

2: Mixed signals on half the Fed’s mandate.

The Fed has a dual mandate to promote maximum employment and maintain price stability. On the employment front, the US economy is underperforming and receiving mixed signals. The recent Weekly Initial Jobless Claims data, a leading indicator on labor market health, has shown increases in those looking for unemployment benefits – this was not good. Wednesday’s ADP Report came in at half of expectations, suggesting private companies didn’t create that many jobs. However, the July Jobs Report showed 943,000 jobs created – which was a strong headline number. Lastly, looking under the hood of the report, the Labor Force Participation Rate didn’t move and remains stubbornly low – meaning there are less people “participating” in the labor force. If less people are working or actively looking for a job, that is a bad thing.

What does this mean? Until the Fed sees “substantial further progress towards its dual mandate,” including maximum employment, the Fed will continue to buy bonds at the current $120B per month rate. The strong headline Jobs Report will reinvigorate the bond taper talk, which will increase volatility in the weeks and months ahead. For homeowners, it also means now is the time, while the Fed continues to artificially hold rates lower.

3: The U.S. is the place to be.

The U.S. is outperforming the rest of the globe from an economic standpoint, and we are also seeing the largest policy response from the Fed and Administration which attracts global investment into U.S. markets. Additionally, while our 10-year Note is yielding an anemic 1.19% as of Thursday, it is a relatively “juicy” yield when compared to the 10-year German Bund, which is -0.50% or the Japan 10-year Government Bond (JGB) which yields 0.0%.

So, even though our 10-year Note yield may look like a bad investment because the yield is far beneath the long-term inflation rate, it is far better than any other bond yield around the globe. This dynamic pushes foreign investors to “park” their money in our Treasury market – leading to lower rates.

Bottom line: Interest rates are at the best levels seen since mid-February, making it a great opportunity to secure a home loan. For anyone considering a mortgage, now is the time. 

The Fed is All Talk and No Action

August 2, 2021jordanreedNews

Last Week in Review: The Fed is All Talk and No Action

This past week long-term interest rates still continue to hover at multi-month lows after the Federal Reserve maintained their position with interest rates and their bond-buying program. Let’s break down what the Fed said and what to look for in the weeks ahead.

“Until substantial further progress has been made”

This may be the most important line of the Fed Monetary Policy Statement.

The Federal Reserve has a dual mandate to maintain price stability and promote maximum employment. Here the Fed is clearly saying they need to see “substantial” progress towards this dual mandate before they can signal tapering bond purchases and ultimately hiking rates. With over a record 9 million jobs available in the U.S., it is going to take some time before the Fed will consider changing its current position.

Stocks, bonds and rates liked the idea that the Fed will continue to buy bonds and “pump up” the markets, despite many economists saying “we don’t really need it”.

“Inflation has risen, largely reflecting transitory factors”

Inflation is the arch-enemy of interest rates, so it is this portion of the Fed mandate Mr. Powell had to defend in his press conference. He was very clear that his definition of high inflation is something that remains “persistently high” for a “persistent” amount of time. So, we will not know if higher inflation is transitory for several months. In the meantime, bonds don’t appear to be worried about inflation as the 10-year Note yield hovers beneath 1.30%.

There is a famous market saying: “Don’t Fight the Fed.” If the Fed says they need to see “substantial” further progress towards their dual mandate and 9 million jobs remain available…we should expect the Fed to maintain its current position and make no changes on its monetary policy.

Providing further cover for the Fed to hold its position is the renewed COVID fears related to the Delta variant, along with some more restrictions. Think lower for longer as it relates to interest rates.

Bottom line: Interest rates are at the best levels seen since mid-February, making it a great opportunity to secure a home loan. For anyone considering a mortgage, now is the time.

Markets do the Safety Dance

July 26, 2021jordanreedNews

Last Week in Review: Markets do the Safety Dance

Last week’s long-term rates and home loans rates touched the lowest levels since early February mainly due to rising concerns over the Delta variant of COVID causing more restrictions, shutdowns, and a slowing economy in the future. Let’s talk about what this “safe-haven” trade into the bond market means and what to look for in the days and weeks ahead.

Safe-Haven Trade Explained

During times of high uncertainty around the globe, much like we saw this week with Delta variant fears, we see what is called a “safe-haven” trade. This is where money flows into the safety of the U.S. Dollar and dollar-denominated assets like Treasury and mortgage-backed securities (MBSs), all at the expense of stocks that are deemed risky.

This past Monday, we watched the Dow Jones Industrial Average fall over 700 points, while both Treasury and MBS prices jumped as the safe-haven trade was on.

What Happened?

By midweek long-term rates ticked higher, erasing all the fear. Markets tend to overshoot both to the upside and downside, so by Tuesday, when “cooler heads”prevailed, stocks rallied sharply, erasing all their Monday losses at the expense of bonds and rates.

The reality is that the economy continues to improve, albeit more slowly, but it also means the Fed is not likely to make changes to interest rates or its bond purchase program anytime soon. If rates stay low and the Fed is not changing course, then it’s always a reason for stocks to party and move higher.

On top of the Fed, the Administration is about to embark on another several trillion dollars in spending, intending to boost economic activity.

Now we can only hope and pray the fears surrounding the new Delta variant come to pass. For now, the markets’ fears have been short-lived. We will get a better sense of reality in the weeks ahead as the U.K. just lifted all their COVID restrictions.

Inflation’s Role

For the past couple of months, consumer prices (inflation) have run above 30-year mortgage rates for the first time in 50 years. This is the definition of unsustainable. At some point, either inflation must come down a lot, mortgage rates must rise, or a combination of both.

It’s no wonder the Fed is buying MBSs. Who in their right mind would purchase MBSs when the interest received is not even outpacing inflation?

The Time Is Now

Could rates go lower? Sure. For that to happen, it would likely take something very bad, like a COVID-induced economic stall becoming reality. The markets are not pricing in that scenario right now.

Next, the Fed is under pressure to start tapering their MBS purchases. It may not happen for some time, but when the Fed announces their intention to do so, home loan rates will move higher in a hurry, and today’s rates will be in the rear-view mirror.

Bottom Line: For the reasons mentioned, this is an incredible interest rate opportunity.

Powell Showers the Bond Market with Love

July 19, 2021jordanreedNews

Last Week in Review: Powell Showers the Bond Market with Love

This past week long-term interest rates spiked higher in response to a hotter-than-expected consumer inflation print only to come back down in response to soothing words from Federal Reserve Chairman Jerome Powell. Let us break down what happened and what to look for in the weeks ahead.

Consumer Prices Are Rising

The Consumer Price Index (CPI) for June showed inflation rising by 5.4% year-over-year, much hotter than expectations and the highest reading since 2008. Inflation is the arch-enemy to bonds and interest rates, so it was no surprise to see long-term Treasury and home loan rates spike higher.

This high reading came one day before Fed Chair Powell was set to speak in front of Congress in his semi-annual testimony on economic conditions and monetary policy.

Heading into the testimony, there was already growing pressure for the Fed to start tapering bond purchases, more specifically MBS purchases, because of inflation fears and froth in the housing market.

Before Mr. Powell took a seat in front of Congress, his prepared speech was released, and he made it very clear the Fed is not going to taper bond purchases just yet despite the higher inflation fears.

There Is Still a Long Way to Go

The Fed has a dual mandate of maintaining price stability (inflation) and to promote maximum employment. They are leaning on the employment side of the mandate when they are saying, There is still a long way to go. With over 9M job openings, the most ever in U.S. history, the Fed is correct. It will take some time to fill millions of jobs.

Mr. Powell also said the Fed is going to talk about tapering in the next couple of meetings. They meet again on July 27th and 28th with the next one in late September. This means the Fed is likely to hold the current course throughout the summer.

Bottom line: Interest rates are at the best levels seen since mid-February, making it a great opportunity to secure a home loan. For anyone considering a mortgage, now is the time.

Less Equals More for Rates

July 12, 2021jordanreedNews

Last Week in Review: Less Equals More for Rates

This past week long-term interest rates fell to their lowest levels since mid-February. Let us go through some reasons why rates declined and what it means for the second half of 2021.

From More to Less

The great reopening of the U.S. economy appears to be fizzling. There are still 9.3M open jobs available, which means the labor market is improving, but slowly. The effect of fewer employed means there will be softening economic growth and lower inflation. Bonds love low inflation, and seeing the 10-year note yield hit 1.25% this past week suggests that higher inflation will indeed be transitory.

Another thing we are getting less of is policy response, both from Congress and the Fed. On the former, the original proposal from the White House was another $4 trillion in economic stimulus through the American Infrastructure Plan and American Families Plan. Those proposals are being batted around Congress and will likely end up being a fraction of the original proposal.

On the latter, the Federal Reserve, who has been so accommodative during COVID, will be less so going forward. At the recent Fed meeting, they changed their forecast from initially hiking rates in 2024 to hiking as many as three times in 2023.

And on the bond-buying program, where the Fed has been purchasing at least $40 billion worth of mortgage bonds each month, they will be doing less in the future, and the pressure is on to start tapering. At the last Fed meeting, some Fed members cited a scorching hot housing market as a reason to stop buying mortgage-backed securities.

Return of Familiar Tailwinds

US bond yields are relatively attractive compared to other large bond markets around the globe like Germany and Japan where their 10-year yields are -0.31% and 0.02%, respectively. This helps the U.S. attract investments from around the globe, thereby pushing yields lower.

Bottom line: Markets tend to overshoot to both the upside and downside, meaning this revisit to rates in February could be fleeting. For anyone considering a mortgage, now is the time.

Powell Soothes the Markets

June 28, 2021jordanreedNews

Last Week in Review: Powell Soothes the Markets

This past week home loan rates improved slightly as Fed Chair Jerome Powell was on Capitol Hill sharing the Fed’s midyear economic outlook. Let us break down what the Fed Chair said, since his words also pushed stocks higher with the NASDAQ reaching all-time highs.

“Long Way to Go on U.S. Economic Recovery”

The Fed could not be clearer than with this line. IF the economy has a long way to go to recovery, THEN the Fed will not be hiking rates anytime soon and will also not likely taper bond purchases in the near future.

Recent economic readings have shown some signs of weakness and a recent report showed over 9 million job openings. The Fed has a dual mandate of maintaining price stability (inflation) and promoting maximum employment. On the latter mandate, the economy is coming up short, and this gives the Fed cover to not raise rates.

“I Have a Level of Confidence in the Prediction of Transitory Inflation.”

The financial markets appear to agree with the Fed. The 10-year note yield at 1.48% is certainly not worried about inflation right now. We will not find out if higher inflation is transitory until later in the year, or even next year, and Powell reiterated this by saying, “It may take some patience to see what is really happening,” or as Axl Rose sang, “All we need is just a little patience.”

On the inflation front, we all must hope the Fed is correct about high inflation being temporary. Persistent and high inflation is devastating to an economy. Outside of supply chain bottlenecks, which have caused high prices in items and appear to be somewhat temporary, there are components of inflation that appear to be “sticky” and less temporary, like wages and housing. We shall find out if the Fed will get it right. Powell did say it’s, “Very, very unlikely the U.S. will suffer 1970’s type inflation.” For the moment, bond markets and rates seem to agree.

“Optimism About the Path of the Economy and Strong Job Creation”

Recent job creation numbers have been reported beneath expectations, which again gives the Fed reason to hold rates near zero while continuing to purchase bonds.

Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed bond-buying program. This program is now in jeopardy, should economic data come in stronger or hotter than expected.