How the yield curve is un-inverting shocks real-estate folks who’d promised rate cuts would push down mortgage rates even further.
By Wolf Richter for WOLF STREET.
The 10-year Treasury yield jumped today by about 12 basis points, to 4.20% at the moment, the highest since July 26, up by 55 basis points from September 17, on the eve of the big-fat rate cut, when the 10-year yield had bottomed out at 3.65%.
Today’s action may have been driven by hawkish commentary by Dallas Fed president Lorie Logan on the future of the Fed’s QT (article coming), by renewed fretting about inflation, and by concerns about the recklessly ballooning government debt that would pile up new supply, or by whatever.
Markets move in a mysterious way, and the “why” may remain elusive, but we do see the outcome, and we know that QT, inflation, and supply are the triple enemies of bondholders (blue = effective federal funds rate which the Fed targets with its headline policy rate):
Mortgage rates, oh my. There goes the housing market, what’s left of it. The daily measure of the average 30-year fixed mortgage rate jumped by 14 basis points today, to 6.82%, the highest since July 26, and up by 71 basis points from the eve of the Fed’s mega rate cut.
At the time of the rate cut, this daily measure of mortgage rates by Mortgage News Daily had dropped by 187 basis points from the peak in October a year ago, to 6.11%, on just a wing and a prayer, having priced in 2% inflation forevermore and many rate cuts.
So now, with a 50-basis point cut under the belt, and with smaller fewer cuts being outlined for the future, and with CPI inflation having risen on a month-to-month basis for the third month in a row, it’s time to unwind some of the exuberant craziness?
The 6-month yield and 30-year yield un-invert. The 30-year Treasury yield today jumped about 11 basis points to 4.50% (red), now matching the 6-month yield (blue). So this is another piece of the yield curve that has now un-inverted.
Normally, the 30-year yield is far higher than the 6-month yield. But in July 2022, with the rate hikes pushing up the 6-month yield, and the 30-year yield following more slowly, the pair inverted when the 6-month yield became higher than the 30-year yield. Now the pair has un-inverted.
This came as a shock to real-estate folks who’d promised lower mortgage rates once the rate cuts start, as the rate cuts would drive down mortgage rates even further. They’d hoped that the yield curve would un-invert with short-term yields plunging on densely-spaced monster rate cuts, and long-term yields falling more slowly but still falling a lot.
Instead, the yield curve is un-inverting with short-term yields falling with the Fed’s rate cuts and dialed-back expectations of rate cuts, while long-term yields are rising on inflation fears, Qt, and the dreaded onslaught of supply of new debt to fund the huge and reckless deficits.
Only the Treasury yields in the 3-year to 5-year range were still below 4%, by just a hair.
The 1-year yield rose to 4.25%, as the Treasury market has been backpedaling on rate-cut expectations. Since September 24, it has risen by 37 basis points.
The 2-year yield jumped 7 basis points to 4.04%, the highest since August 19. But it has roughly been in this range since October 9.
The pair of the 2-year yield and the 10-year yield had un-inverted on September 6, at the time because the 2-year yield had plunged amid rate-cut-mania and continued to plunge until the eve of the actual rate cut. Since then, it has risen by 48 basis points.
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