Tough day in the bond market: Treasury yields rise, 30-year fixed mortgage rate nears 4%. Where is the magic number?

The next round of Fed tightening is sinking, against a backdrop of still brutally negative “real” yields, while the purchasing power of bonds is eaten away by inflation.

By Wolf Richter for WOLF STREET.

Bond fireworks lit up the skies on Friday, following the release of the jobs report that dashed fervent hopes in the bond market that lackluster jobs numbers would prompt the Fed to abandon its bullish tango rates before it even begins. Over the past few days, reports have been circulating about this explaining why the number of jobs would be anything from abysmally low to extremely negative. But the numbers were much better than expected – they were actually quite good for all sorts of reasons – and yields instantly shot up and mortgage rates soared.

The two-year Treasury yield jumped 13 basis points points to 1.32%, the biggest one-day jump since the unrest of March 10, 2020 and the highest since February 21, 2020:

The one-year yield jumped 11 basis points at 0.89%. That’s up from almost 0% in September of last year. During these five months, the world has changed.

The one-year yield and the two-year yield are particularly sensitive to the market’s outlook for changes in Fed monetary policy, namely the feared rate hikes this year and next year, as inflation in the CPI reached 7.0%.

Despite these jumps in yields, they remain ridiculously low and deeply negative in “real” terms: minus CPI inflation, the one-year yield is still -6.1%; and the two-year yield is -5.7%.

The 10-year Treasury yield jumped 11 basis points at 1.93%, the highest since December 23, 2019.

Tough day in the bond market: When bond yields rise, it means bond prices are falling. And it was difficult on Friday in the bond market. Below are the results of two Treasury bond ETFs. They are considered conservative Treasury-focused investments and yield only tiny returns.

The price of the iShares 7-10 Year Treasury Bond ETF [IEF]which tracks Treasuries with remaining maturities between 7 and 10 years, fell 0.8% on Friday and is down about 9% from the April-September 2020 range. The ETF yields 0 .9% per year, and Friday wiped out almost a year of performance.

The price of the iShares 20+ Year Treasury Bond ETF [TLT], which tracks Treasuries with remaining maturities of 20 years or more, fell 2.1% on Friday and is down about 18% from the July 2020 high. The yield is currently at 1.6 % annual. A few hours on Friday incinerated well over a year of yield.

Mortgage rates soared on Friday, nearly 4%the 30-year fixed mortgage rate averaging 3.85%, according to the daily index of Daily Mortgage News. This is the highest rate since late 2019 – except for the rate chaos in March 2020, when rates soared and plunged overnight:

The 30-year mortgage rate moves roughly with the 10-year Treasury yield, but with a spread, since the average 30-year mortgage is paid off in less than 10 years, either because the homeowner sells the house , or refinance the mortgage.

And these increases in Treasury yields and mortgage rates are a reaction to what the Fed is about to undertake: the next cycle of rate hikes and the next cycle of quantitative tightening (QT), which will contrary to what the Fed is preparing to do in terms of repressing interest rates. and massive QE had done. The Fed communicated its plans and Powell set the date for the first rate hike: March 16.

As mortgage rates rise, with today’s super inflated home prices, two things are happening:

First, people are rushing to buy homes to lock in still-low mortgage rates; so in the beginning, rising mortgage rates create a flurry of activity.

And two, with every rise in mortgage rates, more and more buyers hit the ceiling of what they can afford, and they give up. This is not visible in the data at first, as these people are outnumbered by the wave of people desperate to lock in low mortgage rates.

As mortgage rates rise further, more and more people throw in the towel, and fewer and fewer people are desperate to lock in those now higher mortgage rates, which then translates into lower demand. This becomes visible after mortgage rates hit a magic number. This magic number will only become clear in hindsight. This magic number is probably greater than 4%. By the time mortgage rates hit 5%, as they did in 2018, demand will likely decline in a very noticeable way.

Do you like to read WOLF STREET and want to support it? You use ad blockers – I completely understand why – but you want to support the site? You can donate. I greatly appreciate it. Click on the mug of beer and iced tea to find out how:

Would you like to be notified by e-mail when WOLF STREET publishes a new article? Register here.

Comments are closed.