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Sifting Through Ashes For Seeds Of Hope

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There is no way to sugarcoat the state of the bond market or, in turn, the mortgage and housing markets. The rate rose at an almost unprecedented pace, resulting in him one of the fastest cooldowns on record. One of the only ways to find hope in this environment is to imagine a finite amount of bad news.

To be clear, “bad news” is relative. That’s because the resilience of the domestic economy has pushed rates up aggressively, as it has in the past. While this isn’t necessarily a direct relationship, the Fed is looking for some evidence that its unfriendly policies are having the desired effect, one of which is rising unemployment.

So far, unemployment has been low, inflation has been high, and the Fed has been very unfriendly to rates. They are so unfriendly that market participants are increasingly wondering how much they can get away with before signs of unusual stress appear in interest rate markets and elsewhere.

You may have witnessed some of that stress this week. At this point, we need to distinguish between long-term interest rates (such as 10-year Treasury yields and mortgages) and short-term interest rates (such as 2-year Treasury rates and Fed Funds rates). Differences in the behavior of long-term and short-term interest rates can provide clues about market sentiment.

Later in the week, short-term yields moved up, initially faster. If short-term yields are rising sharply in 2022, it often goes hand in hand with the perception that the Fed will raise the Fed Funds Rate faster. To illustrate this point, let’s take a quick look at the relative movement of his 2-year Treasury yield and Fed Funds Rate forecast for September 2023.

After short-term interest rates surged, long-term interest rates paradoxically began to surge further. This was most noticeable on Thursday and Friday mornings.


This is unusual behavior in 2022. This suggests resistance on the part of market participants that the Fed can get away with a much higher rate hike trajectory. At the same time, long-term interest rates rose in protest at the Fed’s unwillingness to acknowledge that its unfriendly policy is already working through the system, even if they don’t see it in their favorite economic reports. .

By 8am on Friday, the bond market was definitely in a bit of a panic mode.Yields (a fancy word for “interest rates”) are at their highest he’s been in over a decade, and volatility is Wall Street Journal article It has suggested that the Fed will discuss the size of future rate hikes at an upcoming meeting. has occurred. Then he took less than a minute and traders pushed long-term rates down.

The following diagram is a bit complicated, but it shows all of the above. The orange line is the expected Fed Funds rate based on Fed Funds Futures after the Fed’s December meeting. The blue line is the 10-year Treasury yield, the most widely accepted long-term interest rate benchmark in the United States. Trading volumes for each line are shown in the bottom section, with Federal Funds futures trading volume spiked just ahead of Treasuries.


That said, the market was ready for any signs that the Fed was slowing its pace of rate hikes. Some time later, such thoughts were forcibly validated by actual comments from her Mary Daly at the Fed who said some things the market had been waiting for. The following bullet points paraphrase these comments.

  • We want to avoid an unexpected recession due to overtightening.
  • Waiting for lagging variables like unemployment and inflation to return to stability could easily lead to over-tightening.
  • We are starting to see an economic slowdown
  • We are now at a stage where we must think carefully
  • At this point, we should consider slowing the pace of rate hikes

All of the above are very important. This suggests that there is sentiment among Fed members to begin considering a move towards an interest rate-friendly monetary policy.Indeed, this never It suggests an easy win or a quick return to low interest rates. Nor does economic data become less important in making sure inflation isn’t rising any further. But this is a small step in the right direction and a small seed of hope in the ashes of the home and mortgage market in late 2022.

Is this image too dramatic? It depends on the person’s point of view. Few would argue that the rise in house prices was sustainable or that the industry did not need to cool down a bit. But the pace of change in interest rates and sales is ideal. It is equally difficult to argue against being sharper than . Unfortunately, if the industry relies heavily on what the Federal Reserve uses to fight inflation, things get bumpy when inflation hits its highest level in decades.Economy This Week Here’s the latest damage from some of the data:

Existing sales reported by the National Association of Realtors did not fall much from the previous month and were fairly close to forecast levels, but those forecast levels were two million homes below the recent peak in terms of annual pace.

20221021 existing sales.png

The National Association of Home Builders released a very pessimistic housing market index (essentially “builder confidence”). The index plummeted from 46 last month to 38 this month, well below the median forecast of 43.

20221021 nl3.png

The 6-month outlook has fallen further, which is noteworthy. because it is almost always higher than the overall builder confidence index. The following chart compares the six-month outlook and headline numbers. This simply speaks to the fear prevalent among builders that things could get worse from here.


Notably, data were not collected until the mid-80s. It’s not unlikely that a similar pattern emerged last time in his early ’80s. degree of interest increased at such a pace. When it comes to rates, multiple news outlets missed their targets again this week because they relied on outdated weekly survey data. The latest actual figures suggest that the average 30-year fixed interest rate is in the 7% range.


weeks ahead

We have some somewhat relevant economic reports next week, but that’s just a placeholder. The next week is very important as it brings us the much-anticipated Federal Reserve Board announcement and the upcoming jobs report. The next week is also very important as the next Consumer Price Index (CPI) will be released on his November 10th. This inflation report has shaped interest rate movements in recent months more than any other report.

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