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The Tug a War at Play

August 23, 2021

Last Week in Review: The Tug a War at Play

What a week!!! The elephant in the room is the uncertainty and chaos within Afghanistan. Bonds and rates embrace such chaos but that wasn’t the case this week as the threats of Fed tapering limited any rate improvement. Let’s break it all down and discuss what to look for next week.

Bad Times = Safe-Haven

What is happening in Afghanistan is highly uncertain and no one knows how, when, or even if the chaos will end. In these moments, the U.S. benefits from being the “reserve” currency of the world, where investors flee to park their money in the “safe-haven” of the U.S. Dollar.

When this happens, it is important to know that Treasuries like the 10-year Note can improve in rate, materially at the expense of almost everything, including mortgage-backed securities (MBS) and home loan rates.

So, while we have endured troubling images with no clear picture of what is to happen next, why haven’t home loan rates improved?

Good Times = Fed must Taper

There is growing fear in the bond markets that the Fed will announce the tapering of their bond purchases because we are seeing better economic times with higher inflation and improved labor market conditions. Moreover, there are calls for the Fed to taper because of the froth in the housing market with rapidly rising home prices and supply costs.

This is very important to homeowners and anyone who buys or sells loans. The Fed is currently committed to buying “at least” $40B in MBSs every month. And lately, rates have ticked higher despite the Fed buying as much as $5B a day in MBSs.

What will happen when the Fed announces they will start tapering bond purchases? Well, there are many “experts” who suggest the bond market already sees it coming and won’t be too largely disrupted. Then there is the other position that witnessed mortgage rates shoot 2.5% higher in rate back in 2013, when Fed Chair Bernanke uttered the tapering words.

It is why the term “taper tantrum” exists – the bond market sold off sharply with rates spiking on the notion the Fed will no longer be the buyer of last resort.

Bottom line: It’s not clear the economy is performing strong enough to warrant tapering just yet. There is the “ugly”, meaning COVID and now Afghanistan which may be enough for the Fed to hold off on tapering for more clarity.

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