Volatility Appears to Be the ‘New’ New Normal
Over the past few weeks, we have been witnessing a significant change in the financial landscape in the United States. During this time, we have seen the stock market come down from its recently achieved historic highs. As the price of stocks has decreased, the value of investors' portfolios, and 401K accounts, have been impacted.
Whether this is a short-term or a long-term phenomenon remains to be seen.
The reality is that the rapid run-up in market valuations since the election in 2016 occurred much faster than is normal, and therefore the likelihood of a correction has been anticipated for some time.
What had not been anticipated, or widely understood is the swiftness with which the sell-off has occurred.
When this happens, it leaves investors with a feeling of a loss of equilibrium, and a sense of uncertainty about the direction of their financial future. This is to be expected.
As the radio personality Paul Harvey used to say: “In times like these, it helps to recall that there have always been times like these.”
Typically, as stocks sell-off, or there is uncertainty about the state of the economy, investors look for safe havens to place their money in. Historically, the safest of safe havens have always been US Treasury Securities.
What happens is when money goes out of stocks, bonds appear attractive due to their relative safety, and their prices go up as investors buy them.
Because the price of bonds is increasing, the yield paid to investors who own bonds goes down. And so, if you want to get a good idea of the direction of mortgage interest rates it is important to really watch the day-to-day movement in the 10 Yr. Treasury Note Yield:
When the 10 Yr. Treasury yield goes up, rates are headed higher, and when the 10 Yr. Treasury yield goes down, rates are heading lower.
Why Is The 10-Year Treasury Note So Important For Mortgage Rates?
One of the reasons the movement of the 10 Year Treasury Note is a strong indicator for rates has to do with the speed of pre-payments on mortgages. That is because most standard 30 Year Fixed Rate Loans have historically been paid off by a refinance or the sale of the home within 10 years. Also, 10 Year Treasury Notes and 30 Year Fixed Rate Mortgages are similar types of investments, so like-minded investors would be looking at both at the same time.
Since Covid began in 2019, the Federal Reserve supported the markets by aggressively buying US Treasury Securities and mortgages backed by the agencies (Fannie Mae and Freddie Mac). This intervention in and support for the markets by the Fed is the main reason we have seen these historically low mortgage interest rates for the past few years. And the housing market has also been a BIG beneficiary of the Federal Reserve because the Fed, by purchasing the lion’s share of mortgage loans in the US and keeping liquidity in the housing market, helped fuel the housing boom we and our clients have all been the beneficiaries of. In essence, the Fed, by keeping liquidity in the system, gave the Real Estate market the needed stimulus to continue functioning.
This time, however, things are different, and here is the reason why:
For the past 18-24 months, we saw how a robust economy, fueled by the Fed’s support, combined with a shortage of housing inventory, has fueled significant appreciation in the Real Estate market. However, since the beginning of the war in Ukraine, and the presence of the worst inflation in 40 years, the Federal Reserve has begun to eliminate the stimulus measures that helped bolster the economy. The Fed has publicly stated that it is its intention to aggressively raise rates as conditions warrant in the economy.
The reason inflation is such a concern is that when wages and prices start to rise more than expected, there is a very real chance that the market may be overheating, and the Fed, by raising rates, slows the market and price increases back down.
So the Fed has begun raising short-term rates, selling their holdings of US Treasury Securities into the market, and reducing their holdings of mortgage-backed securities, and this is a major reason you are seeing mortgage rates going up.
Keep an eye on the 10 Year Treasury yield for a clue as to the direction of mortgage rates, and don’t get caught by surprise if this market turmoil continues.
Robert H. Ruth, Senior Mortgage Banker