We had quite a bit of optimism toward the U.S. economic recovery last week. Daily COVID-19 case counts fell further from their January peak, and vaccinations continued across the country. No one for sure knows if the pandemic will fade away into the summer. But the pandemic is not the only thing driving rates. Economic data last week beat expectations. And in Washington DC, President Joe Biden’s $1.9 trillion stimulus proposal moved forward, which would accelerate the rebound even more.
All of these developments fueled a sudden shock in the Treasury and mortgage-backed security markets. Good news for the economy tends to push rates higher whereas news that the economy is slowing tends to lead to lower rates. The benchmark U.S. 10-year yield hit 1.61 percent on Thursday, its highest level in a year.
A new stimulus is expected to lead to faster economic growth and inflation. Could the Federal Reserve predict what would happen politically in Washington? Of course not. The stimulus is forecast to push inflation higher, probably faster and farther, than our Federal Reserve’s economists expected. Even Fed Chair Powell agreed with the market in expecting a “robust and ultimately complete recovery” but stated that the Fed won’t cut down on asset purchases or consider rate hikes until it sees “substantial further progress” toward its inflation and employment targets.
Many believe that last week’s price moves were less inspired by rate-hike expectations and simply a case of “buying the fundamental dip” before strong economic growth. Although it won’t help the pool of available borrowers to refinance, there’s room for yields to climb higher still. Real yields, which are nominal yields adjusted for inflation, remain negative, signaling there’s still enough weakness in the economy to warrant parking cash in the safe haven.
The Federal Reserve’s Open Market Committee will likely move first in this case to avoid additional Treasury-market drama, but the Fed won’t have the luxury of waiting for the next meeting and will have to respond to the abrupt market moves in speeches this week.
Despite what moves the Fed makes, at First Community Mortgage we are keeping an eye on the markets, honor rate locks, will continue to focus on our brokers’ business.
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