The Fed’s next tightening cycle sinks, amid still brutally negative “real” yields, as inflation eats into bonds’ purchasing power.
For Wolf Richter for WOLF STREET.
Bond fireworks lit up the sky on Friday, following the jobs report release that dashed fervent hopes in the bond market that poor jobs numbers would cause the Fed to back down on its rate-hike tango even sooner. for it to start. In recent days, reports have emerged explaining why the number of jobs would be anywhere from very low to hugely negative. But the numbers were much better than expected: Actually, they were pretty good for all sorts of reasons. – and instantly yields skyrocketed and mortgage rates soared higher.
Two-year Treasury yield soared 13 times points to 1.32%, the largest one-day jump since the turmoil of March 10, 2020 and the highest since February 21, 2020:
The one-year yield rose 11 basis points at 0.89%. This has increased from almost 0% in September of last year. During those five months, the world has changed.
The one-year yield and the two-year yield are particularly sensitive to the market outlook for monetary policy changes by the Federal Reserve, i.e. dreaded rate hikes this year and next, as inflation of the CPI has 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 rose 11 basis points to 1.93%, the highest since December 23, 2019.
Busy day in the bond market: When bond yields rise, it means bond prices fall. And it was tough on Friday in the bond market. Here’s how two Treasury bond ETFs did. They are considered conservative investments focused on Treasury securities and pay only minimal 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 9% from the April-September 2020 range. The ETF yield is 0.9% per year and on Friday it wiped out nearly a year’s worth. produce.
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 regarding 18% from the July 2020 high. The yield is currently 1.6% a year. . A few hours on Friday incinerated more than a year’s worth of production.
Mortgage rates soared on Friday, approaching 4%with the 30-year fixed mortgage rate reaching an average of 3.85%, according to the daily index of Daily Mortgage News. This is the highest rate since the end of 2019, except for the rate chaos in March 2020, when rates rose and fell overnight:
The 30-year mortgage rate moves roughly with the 10-year Treasury yield, but with a spread, since the average 30-year mortgage pays off in less than 10 years, either because the homeowner sells the home or refinances the home. mortgage.
And these increases in Treasury yields and mortgage rates are a reaction to what the Fed is regarding to embark on: the next cycle of rate hikes and the next cycle of quantitative tightening (QT), which will do the opposite of what than the Fed’s interest rate crackdown and massive QE had done. The Fed has been communicating its plans, and Powell set the date for the first rate hike: March 16.
As mortgage rates rise, with Today’s super-inflated house pricestwo things are happening:
One, people rush to buy a house to secure still-low mortgage rates; So initially, rising mortgage rates create a flurry of activity.
And two, with every increase in mortgage rates, more homebuyers hit the ceiling of what they can afford and drop out. This is not visible in the data at first, as those people are outnumbered by the rush of people desperate to secure low mortgage rates.
As mortgage rates rise even higher, more and more people are throwing in the towel, and fewer and fewer people are desperate to secure those now-higher mortgage rates, which then translates into decreased demand. This becomes visible following mortgage rates go up to a magic number. That magic number will only become clear in hindsight. This magic number is likely to be above 4%. By the time mortgage rates reach 5%, as they did in 2018, the demand is likely to be very visible.
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