6/13/2017 | Casey Fleming
Last week I wrote that we were almost certainly going to see the Feds raise short-term rates when they meet this week on Wednesday, June 14th. I predicted that mortgage rates would rise starting Thursday in anticipation of what the market would do in response to whatever action the Feds took.
If you look at the chart above, you’ll see that interest rates did, indeed, start rising on Wednesday, actually, but the rise in rates was extremely small. This tells me that investors were already pricing in whatever risk they thought any possible move by the Feds could pose, and that they are confident that the market for rates will continue to be favorable after the announcement.
Very small rise in interest rates
In fact, the U.S. 10-Year Treasury Yield (the red line) rose 0.04% on Wednesday, 0.01% on Thursday, 0.02% on Friday, and has held steady so far this week. These are incremental hedging adjustments, not corrections in the market by any means.
Meanwhile, the Fannie Mae 60-day yield (blue line) rose by 0.009% on Wednesday, 0.036% on Thursday, 0.04% on Friday, and 0.014% on Monday. These are larger moves than Treasury Bonds, but still incremental, not significant. For mortgage bond-buyers, clearly the risk is a little greater than for Treasury Bond investors as we get close.
The Freddie Mac weekly survey, (green line) which measures rates actually locked by consumers over the past week, doesn’t reflect market changes yet as it measures Thursday through Wednesday activity. Expect next week’s report to show a small bump up.
The bottom line – rates are up very slightly this week so far, and if the investors are right, should move back down after the Feds announcement Wednesday afternoon, possibly under our 2017 lows.
Meanwhile, lender profit margins rise
Let’s take a look at my other favorite chart, the yield spread premium that lenders charge over the wholesale cost of funds. You can see that the margin has been rising since mid-May, about the time interest rates started moving steadily down. This makes sense – lenders tend to follow market yields, but with a lag. They want to make sure the trend is sustainable before jumping in and finding themselves writing loans at interest rates the market suddenly doesn’t want. So, for now, while their cost falls, their pricing falls, too, but lags behind, giving them a higher margin – for now.
Overall, though the margin has held fairly steady for the last four months, after making a strong move down in early February. Expect this trend to hold, barring major market surprises.
Economic Calendar – Feds Raise Interest Rates
We already know that Wednesday brings the Fed meeting and a statement at 2:00 PM Eastern, with a Janet Yellen news conference afterward. The question of whether the Feds raise interest rates or not might not be as important as their statement and Yellen’s press conference, as they are likely to address questions about adjusting their balance sheet by cutting back on purchases of Treasury Bonds and Mortgage-Backed Securities.
They will no doubt approach the rebalancing initiative very slowly and carefully so as not to upset the market too much. The statement will give investors some insight into how hawkish or dovish the members of the Federal Open Market Committee are feeling, however. Aggressive movement would not be welcomed by investors, while a measured approach will be welcomed.
Wednesday also holds several other potential market-moving reports, including the Consumer Price Index, Retail Sales and Business Inventories.
Thursday has a couple of important reports, too, with Jobless Claims having more visibility after the very weak jobs report a couple of weeks ago, plus the Philadelphia Fed Survey and the Empire State Manufacturing Report, both measures of business strength in their regions.
Friday is quieter. Housing Starts and Building Permits don’t usually surprise the market, but the University of Michigan Consumer Sentiment Index can, and could move markets. The risk there, however, is more for rate improvement, rather than worsening.
Quiet after the storm
Next week is a different story, as it will be a very quiet week for economic reports. Thursday’s Leading Economic Indicators for May is the only major report due that contains a high risk for interest rates, and since it follows this week’s Fed Minutes it seems less likely to create anxiety-driven market movements.
A quiet week next week could be just what the doctor ordered when it comes to interest rates, as it will give investors time to digest the Fed action. If the Feds raids interest rates by 0.25% as most think they will and announce more details about adjusting their balance sheet, investors should feel comfortable moving money into bonds, driving down interest rates.