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Rates Blast Back Up Toward Long Term Highs

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As we discussed last week, unprecedented volatility mortgage interest rate at this point. We don’t see record fluctuations from day to day. Rather, it is a consistency that sees a great deal of variation. That trend is very much alive today with another big rise following Friday’s big drop.

In both cases, it would not be surprising if the citation rate changed by a quarter of a percentage point (0.25%) overall. By way of overview, interest rates have seen two- to three-month increases several times over the past few years, but have not fluctuated by more than half. In other words, today alone saw twice as many moves as he did throughout the fourth quarter of 2021. It happened four times in a row!

There are common and ongoing reasons for volatility/weakness and some specific motivations today. Think of a company issuing bonds to fund its operations/expansions etc.). Some amount of this activity was already expected, but reality far exceeded expectations.

Corporate issuance lowers interest rates for two reasons. First, bonds are often sold as a way to manage interest rate risk during the issuance process. Second, corporate bonds compete with mortgage bonds and Treasuries for investor demand. Less demand = higher rate, all other things being equal.

In addition to corporate issuance, there was strong economic data this morning as a key report on the services sector beat forecasts slightly. Strong data is always bad for rates in general, but it’s especially troubling when the Fed has been bluntly saying it needs to do some damage to the economy to keep inflation down. ‘Does damage’ is another way of saying ‘higher interest rates’.

There is no way of knowing when the top will come in for the current slog for long-term highs. Temporary relief is certainly possible, but it could easily be followed by a swing similar to that seen in recent weeks. A sustainable improvement comes when inflation is definitely trending down and economic data has market experts talking about the possibility of another recession.

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