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May Ends With Rate Relief

June 2, 2023

This past week interest rates moved lower on optimism the debt ceiling will be lifted and on surprisingly low inflation out of Europe. Let’s discuss what happened and investigate the week ahead.

Debt Ceiling Fix Coming 

As of this writing, the House of Representatives passed a bill to suspend the U.S. debt limit through the 2024 election. Included in the bill are non-defense spending caps, expansion of work requirements for some food stamp recipients as well as a clawing back of unused COVID-19 relief funds.

This bill now goes to the Senate where it will need to be approved and then sent to President Biden’s desk for signing before the June 5th deadline, where it is believed the U.S. would no longer have funds to pay its debt.

In response to the optimism, short-term treasury yields like one-month bills moved sharply lower as the fear of default is removed. This decline in yields spread across the entire bond market, with the 10-year note yield moving from 3.80% to 3.60% in the matter of days.

Fed Pause in June

A couple of key Federal Reserve officials spoke this week and suggested the central bank should not raise rates at the next Federal Open Market Committee on June 14th. Why? They are citing the policy lag effect and its uncertain impact. Essentially, the Fed has already raised interest rates from 0.0% to 5.00% in a little over a year, most of which has yet to seep into the economy. With inflation declining, the economy slowing and the banking crisis lingering, it is probably a good time for the Fed to pause.

On Thursday, the inflation reading unit labor costs, within Q1 Productivity, came in well below expectations. This means it is costing less for businesses to produce, which is disinflationary and another reason for the Fed to take a break from rate hikes.

Low Inflation Surprises in Europe

This past week, Germany, Spain, and other countries reported inflation was well below market expectations. As a result, yields in Europe declined, and that helped U.S. yields to move lower as well. If the trend of lower inflation continues here in the states, and in Europe, we should expect rates to continue to decline.

Bottom line: With some of the uncertainty surrounding the debt limit deal lifted and with inflation data cooling, the mortgage market could see a continued ease in borrowing costs.

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