Yellen for Higher Rates

Last Week in Review: Yellen for Higher Rates

We watched long-term rates, like mortgages, improve slightly this past week despite a surprising comment from Treasury Secretary Janet Yellen. Let’s break it all down and look at what’s on tap for next week.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat” – Treasury Secretary, Janet Yellen

Janet Yellen was being interviewed on Zoom when she unleashed this seemingly innocent and likely honest comment. Well, it sent shockwaves across the stock market, pushing the NASDAQ down as much as 400 points last Tuesday alone.

Yellen was once the Fed Chair, and in that former role, it would be her duty to share comments on monetary policy. As Treasury Secretary, it is not her role to discuss rates. Especially, considering the active Fed Chair Jerome Powell saying over and over just days earlier at the Fed Meeting that “now is not the time” to raise rates.

There is big pressure on the Fed to help keep rates low. First and foremost are the upcoming “Plans” being debated in Washington D.C. The American Jobs Plan and American Family Plan are estimated to cost another $4 trillion, on top of the $1 trillion-plus still not spent from the American Rescue Plan. All this spending must be paid for by selling new bonds in the market. What we as a country can’t afford now is higher rates as the expense to service all this new debt will be an enormous burden.

Sell in May and Go Away

Stocks, especially the tech-laden NASDAQ, may have used Yellen’s comment as a reason to sell – but some of the downward pressure in stocks may be a seasonal phenomenon called “Sell in May and Go Away”. The idea is that stocks generally underperform during the summer months when many take vacations, thereby creating lower trading volume, larger price swings, and more risk.

As you could imagine, the pain in stocks was a gain for bonds. The 10-year yield declined to 1.56%, down nicely from 1.75% from just a few weeks ago.

If the summer selloff in stocks continues, we may see further improvement in rates.

Opportunity knocks again

With the recent improvement in rates, many more people can still benefit from a refinance and it will certainly help drive the purchase market. However – any rate improvement could be short-lived – here’s three reasons why locking at today’s rates may make sense:

  1. Treasury Secretary Janey Yellen’s comments for higher rates was honest. Lumber and other commodity prices are soaring – higher rates would cool that off.
  2. There is growing pressure on Fed Chair Powell to start “tapering” bond purchases. Again, in response to “frothy” assets like stocks and real estate.
  3. We are going to see higher inflation numbers over the next few weeks – what we don’t know is how high the numbers will be or how bonds will react. Bonds do not like inflation – it’s like kryptonite to Superman…a killer.

Bottom line: Rates have improved of late, but the good times may be relatively short-lived. Those thinking about locking in today’s rates should do so.