Mortgage rates have had a rougher start to the new year, climbing above the 7.25% mark recently. The big question that is on everyone's mind is "where are rates headed?" Let's start off with what we do know.
The Fed has two main weapons in its arsenal: manipulating rates and the monetary supply. So far, we have seen the Fed take center stage with its interest rate policies. We have gone from historic lows in 2021 to aggressively raising them at an unprecedented pace, to a pause, and to a cutting cycle that began in September of last year.
Ironically, as discussed in the last issue, as the Fed's funding rate has been cut, the Treasury yields have increased. One assumes they would move in tandem with each other. Therefore, bond markets are not on the same page as the Fed on this one. Take a look below. After the 50bp rate cut in September, mortgage rates skyrocketed. (graph of mortgage rates below)
So if the Fed cutting rates has not helped mortgage rates because of bond market activity, what will?
As discussed in prior issues, it boils down to the demand for US Treasuries. One way the US services its debt is by financing it. They sell these T bills, T notes etc. to the market and offer a yield on that investment. As the demand for these treasuries increases, the prices increase, and inversely, the yields (and mortgage rates) decrease. As demand for treasuries increases, mortgage rates decrease.
The problem we have had for the past decade is that foreign demand for US treasuries have decreased. Take a look below (I hope it's not blurry). 
You'll see that in 2014, 48% of Treasury debt was owned by foreign nations vs 33% in 2023. With a lot of foreign buyers out of the market, we can also see how that has depressed bond prices and increased yields.
During the battle against inflation which started in 2022, the Fed raised rates aggressively and they also experienced quantitative tightening, QT. They essentially took money out of circulation in order to ease inflationary pressures. (remember: inflation is an increase in monetary supply. The increase in prices of goods is the byproduct of more dollars in circulation).
I see the Fed switching gears with their monetary policy and turning on operation quantitative easing, or QE, this year. They will increase the money supply and use that to purchase their own debt, the treasuries. This in turn will create an artificial increase in demand, raising the prices and decreasing the yield (will see decreased mortgage rates). I wouldn't be surprised to see this begin in the next 3-6 months.
The next Fed meeting is on the 29th of this month. They have already stated that they expect to see 50bp of rate cuts this year. Don't panic if we see a pause during this next meeting. More important will be the Fed's outlook during Chairman Powell's speech.
Here is what's in store for this week
Monday
- Nothing Scheduled
Tuesday
- NFIB Optimism Index
- PPI (came in below expectations today)
- Kansas City Fed President Schmid Speaks
- New York Fed President Williams delivers opening remarks
Wednesday
- CPI
- Richmond Fed President Barkin Speaks
- New York Fed President Williams Speaks
- Chicago Fed President Goolsbee Speaks
- Fed Beige Book
Thursday
- Initial Jobless Claims
- US Retail Sales
Friday
- Housing Starts
- Building Permits
- Industrial Production
- Capacity Utilization
Look out for today's CPI report. If it comes in below expectations, it should help us heading into the Fed meeting.
Comments(6)