Mortgage rates hit a new 2022 high in the bond market selloff

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After cheering on Wednesday’s Fed rate hike, investors lost their appetite for bonds Thursday in a sell-off that pushed mortgage rates to new highs of 2022.

Bond markets picked up on Friday, with 10-year Treasury yields, a barometer for mortgage rates, down from a high of 3.77%. Strong investor demand for mortgage-backed bonds and securities drives their prices higher and yields lower.

But renewed demand for bonds on Friday could prove short-lived if driven by a transient flight to safety by investors. Former Dallas Fed Chairman Richard Fisher told CNBC that he expects 10-year bond yields to hit 4% by the end of the year.

Shares tumbled on Friday on fears that, as the war in Ukraine drags on, ongoing moves by the Fed and other central banks to raise short-term interest rates to fight inflation will eventually lead to a recession.

“The market thinks the economy will slow down faster than the Fed,” said Mark Cabana, head of US rate strategy at Bank of America. New York Times.

Mortgage rates hit new highs of 2022

Optimal Blue Mortgage Market indices, updated daily, showed rates for 30-year fixed-rate mortgages that reached a new 2022 high of 6.4% on Thursday.

While 30-year fixed mortgage rates rose above 6% in June due to similar fears, by August 1 they had fallen to 5.26%, with mortgage-backed securities investors betting that inflation would have eased and the Fed would have slowed the pace of interest rate hikes.

But mortgage rates and Treasury yields have been steadily rising since August 1, as Fed politicians have continued to wire their determination to fight inflation “forcefully”, even if it brings “some pain to the families and businesses “.

At the end of the last two-day meeting this week, Fed policy makers made it clear that they are ready to continue raising the federal funds rate in the short term to reach a target of 4.4% by the end of this year. year and keep rates high until inflation falls.

Fannie Mae economists predict a fourth 75bp hike in November and a 50bp hike in December to meet the federal funds rate target.

“This is above our most recent rate expectations, although we have long predicted that the Fed would need to tighten monetary policy aggressively to fight inflation and, in doing so, could cause the economy to fall. in a recession in 2023, “Fannie Mae Economist Nathaniel Drake said in a statement Friday.

While Treasury and mortgage debt markets took the news quickly on Wednesday, a large sell-off in bond markets on Thursday pushed Treasury yields and mortgage rates higher.

While central banks in Britain, Sweden, Switzerland and Norway also raised rates, “it was the Fed’s signal that high US rates will last until 2023 that triggered the latest sell-off,” Reuters reported.

At a press conference on Wednesday, Fed Chairman Jerome Powell seemed intent on quashing speculation that the Fed will ease rates at any time, noting that the Fed does not see inflation returning to its 2% target until 2025.

“So far there is only modest evidence that the job market is cooling down,” Powell said. “Job offers have decreased slightly. Releases are out of their all-time highs. There are signs that wage measures may flatten. Earnings on wages are moderate, but not much. ”

In a note to clients on Friday, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said his company’s forecasts “suggest that the economy will not fall into recession.”

But Shepherdson said the fact remains “that the Fed clearly wants the job market to weaken pretty sharply. What is not clear to us is why. We believe inflation will plummet in the next year as margins recompress, in the wake of rapid normalization of supply chains, to the point of reaching an undershoot of the core PCE [personal consumption expenditures] inflation next summer is a real possibility. ”

Rates are not expected to decrease

Source: Fannie Mae’s Housing Forecasts.

Fannie Mae economists are taking the Fed for the word that it is not backing down on tightening monetary policy.

In an August forecast, Fannie Mae economists predicted that 30-year fixed mortgage rates would likely peak during the second quarter at 5.2% and retreat for five consecutive quarters at an average of 4. 4% during the second half of 2023.

But in their September forecast, Fannie Mae economists said they now see mortgage rates reach a peak of 5.7% during the last quarter of this year and the first quarter of 2023, before dropping slightly to the 5.5% in the last three months of next year.

If there was a bright side to mortgage rates coming out of this week’s Fed meeting, it is that Powell said there are no plans to accelerate “quantitative tightening” to cut the bank’s nearly $ 9 trillion balance sheet. central.

The Fed’s balance sheet

Assets held by the Federal Reserve through quantitative easing purchases now include $ 5.67 trillion in long-term Treasuries and $ 2.71 trillion in mortgage-backed securities. Source: Federal Reserve System Board of Governors, Federal Reserve Bank of St. Louis.

The Fed is currently losing $ 60 billion in Treasuries and $ 35 billion in mortgage debt each month by letting maturing assets be written off the books. In the past, Fed policymakers have said they would also consider selling Treasuries and mortgage debt if needed to accelerate the tightening, which would put more upward pressure on mortgage rates.

“It’s not something we’re considering right now and not something I expect to consider in the short term,” Powell said Wednesday. “It is something we will turn to, but the time to turn to it is not near.”

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