The 10-year Note is a proxy for mortgage rates, and when it crossed above 3% this week, rate spike hype reached fever pitch. Here’s ever-precise rate watcher Matt Graham dissecting the hype:
It will come as no surprise that I feel the level of discussion about 10yr yields being at 3% is overdone at best, and misguided at worst. Actually, it’s clearly overdone, so let’s talk about how it’s misguided by taking a quick inventory of a few fundamentals in play the last time rates crested 3% compared to those same fundamentals now.
CORE CPI INFLATION
AVERAGE (6-quarter) GDP READING
NOW: 2.6 (could be higher on Friday)
THEN: S&P closed out 2013 around 1850
NOW: 2634 at yesterday’s close
FED POLICY STANCE
THEN: Tapering announced, but reinvestments remained and rates were pinned at 0-.25
NOW: Reinvestments being tapered (more to come). Fed target: 1.5-1.75% and more hikes foreseen
OTHER CENTRAL BANKS
THEN: Europe had not even begun its big QE plan yet
NOW: Europe’s big QE plan slated for tapering after Sept 2018. Other central banks talking about tightening.
FISCAL POLICY STANCE (ISSUANCE OUTLOOK)
THEN: cruise control. No major developments after Fiscal Cliff (resolved Jan 2013, well before rate spike)
NOW: Tax bill creates huge Treasury issuance needs (selling more bonds to cover revenue loss). This is certainly priced-in to current rates, but note completely. It’s also a moving target until we see what the increase in revenues looks like from any uptick in economic activity/profits/earnings/etc.
The bottom line is this: if rates managed to make it just above 3% then, they should clearly by much higher now. They would be there already if markets didn’t have doubts about how the next few years would pan out. There’s also some inherent limit to how quickly markets are willing to move relative to certain inputs. Things like the taper tantrum and the financial crisis can cause the biggest movements. The 2016 presidential election and the tax bill were close 2nds.
The point is, we’re likely still on a path toward higher rates–one that will only be derailed by things like full-blown trade wars and/or a bonafide bear market in stocks. Of course the rolling-over of the economic cycle (recession) would do the trick as well, but we’re not quite there yet.
So if much of the pain is priced-in, but there’s some more pain left to be doled out, how high could we go? 10yr yields of 3.25% serve as a base case for many analysts. That doesn’t mean they’d be a hard and fast ceiling necessarily, but rather, that’s the plateau yields would need to reach before more serious thought could be given to a correction toward lower rates that we could actually get excited about.
Great perspective from Matt. In addition to what he said, the MBA updated its monthly projections for rates, home sales, and loan originations this week, and here’s a few important stats that bode well for housing:
– The 10-year note ended 2017 at 2.4% and is projected to end 2018 at 3.2%.
– 30-year fixed mortgage rates ended 2017 at 3.9% and are projected to end 2018 at 4.9%.
– $1.110 trillion home purchase loans and $600 billion refi loans were made in 2017. $1.168 trillion home purchase loans and $443 billion refi loans are projected for 2018.
– 5.542 million existing homes and 617,000 new homes were sold in 2017. 5.659 million existing homes and 654 new homes are projected to sell in 2018.
– Yes, it’s jarring that rates have risen so quickly early 2018, but it’s possible the pain came mostly at once and the rate spike now levels off. Projections call for 4.9% mortgage rates by year end, and they’re about 4.625% to 4.75% today. Going from this to the 4.9% year-end projection coincides with projections of 10-year note rising another 20 to 25 basis points. This is mild if it played out over remainder of 2018, especially compared to the Q1 spike.
– Yes, from a lender perspective the pain continues as refis drop another 26% this year, which comes on top of a 40% refi drop last year. But more homes will sell and more home purchase loans will be made this year than last year, which is good for homebuyers and lenders.
– No, rate rises are not enough to overcome demand. Here’s MBA chief economist Mike Frantoni on why.
– No, higher rates won’t kill 2018 home buying.
–Is 10yr Note Crossing 3% A Big Deal Or Not? (Matt Graham of MBS Live/MND)