The Federal Reserve Strike Again

Casey Fleming

Last weekend I wrote that markets would probably idle until the Federal Reserve published their announcement on Wednesday afternoon after their two-day policy meeting.  After the announcement came out the stock and bond markets both rallied dramatically, driving Treasury bond yields and mortgage-backed security yields lower.

When Janet Yellen speaks, people listen.
When Janet Yellen speaks, people listen.

To see how dramatic the words of the Federal Reserve can be, look at the chart to the right, which measures relative yield for the ten-year treasury note.  The sharp downward movement happened in the minutes – minutes – following the Feds’ announcement.  How did this translate into mortgage rates?

They moved down on Friday, but not to the extent that you and I would hope for.  Remember, though, interest rates tend to jump up and settle down.  Is there hope for next week?

The major economic reports issued last week painted a mixed picture of our economy – something we are getting used to.  Retail sales were down.  Inflation is fairly tame as the CPI was actually negative, although core CPI was up slightly.  Housing starts were slightly better than expected but building permits were slightly below expectations.  Jobless claims were up from the previous week, but still below expectations.  The Philly Fed index was very positive, and leading indicators were slightly up but consumer confidence was down.

Get the picture?  It’s really obvious that it’s not obvious how the economy is doing.

Treasury and MBS yields dropped on Wednesday after the FEderal Reserve announcment
Treasury and MBS yields dropped on Wednesday after the FEderal Reserve announcment

Let’s back up and take a look at the picture for mortgage rates.  In the chart above you can see that the yield on 10-year Treasury bonds (redline) inched up in anticipation of the Fed’s announcement, and as we saw in the previous chart came back down Wednesday afternoon, and kept moving lower Thursday and Friday.  Investors seem to think inflation is not an issue and that the economy is not likely to expand too rapidly.

Mortgage-backed securities (Blue line) followed on Wednesday but leveled off Thursday and Friday.  Retail mortgage rates (green line) are reported as weekly averages looking backward, and are reported on Thursday.  You can see they actually came up last week, but that’s not surprising since the report covers loans locked since the Friday before.

The margin rose last week, putting pressure downward on interest rates IF underlying rates hold steady
The margin rose last week, putting pressure downward on interest rates IF underlying rates hold steady

As you recall I also track the yield spread premium – basically the profit margin lenders earn as measured by the difference between the yield Fannie Mae wants to earn on their money and the interest rate lenders charge consumers.  As you would expect when underlying rates dip but retail rates don’t the margin jumped last week.

However, since rates settle down, it could take a few days for retail rates to fully follow wholesale rates down.  It takes time for this trend to develop.  We’ll have to look to next week.

So what can we expect for economic news next week?  Monday, Tuesday and Wednesday offer little in the way of reports that are likely to be earth-moving.  Big-ticket sales in the form of durable goods orders and core capital equipment orders come out on Thursday, and are expected to be lower.  Better-than-expected readings are not likely to boost the stock market, but lower-than-expected could shake things up a bit.

Friday’s Gross Domestic Product report is expected to continue to show moderate growth, and anything but a far miss in one direction or another would probably cause the market to yawn.

Of course, lots of news in the form of world events and politics could trump these reports and cause significantly more dramatic movement, but we can’t predict when, for instance, North Korea will attack the south.

So all this is probably very good news for interest rates.  If Treasury yields and mortgage-backed –security yields remain low, look for the margin to compress and for rates to settle down next week.  Because they already at such remarkably low rates, don’t expect massive improvements.  Instead, take the small dips and lock when you see a rate and cost that you’re happy with.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
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This article represents the opinions of Casey Fleming, and not necessarily those of C2 Financial. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial, have any magical insider information about bond markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial are responsible for decisions that you make regarding your own choices about your mortgage or those of your clients.

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Comment (1)

  1. Thank you very much Casey. Great article and I think rates will be fine for the rest of the year or maybe longer. It will be interesting to see how things might change after the elections. I just wish the prices of homes in the Bay Area would settle down, because it’s nuts out there.

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