The MBS markets are currently 20-50 basis points worse than yesterday morning based on increased worries in the markets about the Fed slowing their pace of short term rate cuts and the market’s increasing worries that inflation and Federal budget deficits could harm longer term interest rates.
The bond and stock markets are still in the early stages of trying to assimilate the impact of the elections on the economy, and this reassessment of the economic outlook will likely continue for a few months. Until the markets settle on the new equilibrium level for stock and bond prices, we will continue to see large daily price swings in stock and bond prices. Borrowers who want to float their rate lock in highly volatile markets are making very risky and potentially very poor financial decisions.
If President-elect Trump and Congress can grow the economy without pushing up inflation and reduce the Federal budget deficit at the same time, this would push mortgage rates lower. However, if inflation rates increase and remain elevated, and at the same time the Federal budget deficit grows larger, mortgage rates will move higher, possibly much higher. The Retail Sales report for October came out this morning showing a 0.4% increase in October. After removing automobile sales, the number was only up 0.1% for the month, but the September report was upwardly revised today to be double its previous levels with total Retail Sales increasing by 0.8% and after removing automobile sales they were up 1.0% for the month. The net impact of this report this morning is that the economy is growing at a steady clip and this increases worries about inflation rates picking up. This is why MBS prices are down this morning.
The yield on the 10-year Treasury bond went above 4.50% earlier this morning, which is its highest level in almost six months. The yield is presently 4.463%. Below is the graph of the yield on the 10-year Treasury over the last five trading days.
Fed Rate Cuts. Federal Reserve Chairman Jerome Powell said yesterday that the Fed will be cautious on cutting rates as they keep their eye on the direction of inflation. This should not have been a huge shock to the bond markets, but bond prices did worsen yesterday afternoon and continued to do so this morning.
As of this morning, the Fed Futures market is estimating a 61% probability that the Fed will do a 25-basis point rate cut in their next meeting in December, and about a 91% probability that that the 25-basis point rate cut will happen by the January meeting. The markets are predicting only three total cuts of 25 basis points each will occur in the next 12 months. As a reminder, any cuts by the Fed will impact short term rates but have little or no impact to longer term rates such as 30-year fixed rate mortgages.
This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company.
