Feb and Bond Market Are Quiet for a Change

May 2, 2022

Last Week in Review: Feb and Bond Market Are Quiet for a Change

This past week was a bit quiet as no Federal Reserve officials were talking to move the market. However, this changes next week, as we approach the highly anticipated FOMC (Federal Open Market Committee) Meeting. Let’s discuss what to look for as we wait on the Fed.

Last week was the “quiet period,” where no Fed officials talked about the economy or monetary policy seven days before the upcoming Fed meeting. The U.S. bond market embraced the quiet and lack of jawboning with rates improving slightly from the previous week.

Ironically, Fed President James Bullard recently said the “bond market was not a safe place to be”…and what we watched last week was the opposite. Amidst high uncertainty in Asia and an economic slowdown in China, investors around the globe sought the “safe-haven” of the U.S. Treasury market, which also helped home loan rates improve a bit.

The One Rate the Fed Can’t Control

“There is an obvious need to move expeditiously to a more neutral level and more restrictive levels if needed to restore price stability,” Fed Chair Jerome Powell, March 2022.

This quote from Fed Chair Jerome Powell at the March Fed Meeting highlights the Fed’s desire to lift the Fed Funds Rate 2.00% or more from current levels. The Fed wants the short-term rate to be “neutral” where it neither helps nor hurts the economy.

The Fed can’t control long-term rates like mortgages or the 10-year note yield which are influenced by inflation and economic growth. Until now, long-term rates have gone up solely on inflation fears and the tough talk of the Fed.

Next week, expectations are for the Fed to hike the Fed Funds Rate by .50%. This will have no impact on home loan rates. Much like 2018 when the Fed hiked rates a 4th time, mortgage rates improved dramatically as it was perceived the Fed was going to slow the economy too much with more rate hikes. Time will tell what the Fed will be able to do in this rate hiking cycle. There are heightened signs that the Fed won’t be able to hike as much which includes U.S. economic growth slowing quickly from last year’s pace.

Peak Signs

The 10-year note yield, currently at 2.84%, is below its peak of 2.98% seen on 4/20. If it remains beneath 3.0%, we will continue to see much-needed signs of stabilization in home loan rates. However, if the 10-year spikes again and moves back above 3.0%, we should expect home loan rates to move another leg higher.

The first read on Q1 2022 GDP showed that within the data, the inflation reading Core PCE (Personal Consumption Expenditure) continued to rise while growth fell 1.4% from the near 7% read in Q4 2021. Slow growth and high inflation paint an uncertain future.

Bottom line: Home loan rates are at an important juncture. While MBS attempt to stabilize, there is a real threat that rates can move another leg higher and fast. If you are considering a purchase transaction, now is the time to lock.

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