Brutal Week For Rates But There’s Hope (Hopefully)

Rising rates have been on the menu for months, but the drama kicked into a higher gear this week.

Maybe you heard about this?  We’ve certainly been discussing it in recent newsletters (especially last week’s).  The rising rate narrative hit the mainstream this week as it was widely credited for doing damage to the stock market.

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Perhaps you even caught one of Thursday’s many mortgage rate headlines citing the spike in Freddie Mac’s weekly mortgage rate survey.  Freddie reported a jump in 30yr fixed rates from 2.81 to 2.97, their biggest in nearly a year.

Unfortunately, Freddie was low last week and they’re WAY low this week.  This is a common problem when things are this volatile.  Although their survey is published on Thursdays, most of the responses are in by Monday.  As such, their numbers didn’t capture the brutal spikes that came later in the week.

How brutal can a spike really be if we’re still talking about rates in the low 3’s?  That’s entirely a matter of perspective.  If you’d decided to float your rate back at 2.75%, figuring that rates only ever go lower, February hasn’t been great for you.  

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So why is all this happening?  And more importantly, is it going to KEEP happening?

First off, two separate things are happening.  On the one hand, we have the well-known, well-understood, and well-explained rising rate trend that’s been intact for months.  If you’re a regular reader of the newsletter, you might be tired of that one by now.  You can revisit one of any number of past newsletters for a refresher (here’s a good one from late January).  

In a nutshell, if covid caused a rapid surge to persistent all-time low rates, the improving outlook had the opposite effect–albeit a gradual one at first. 

The other thing that’s happening is a recent acceleration in the longstanding trend–first in 2021, but then to an even greater degree over the past 2 weeks. 

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Plummeting case counts played a big, logical role here as well as the Georgia senate election and progress on fiscal stimulus.  Stimulus hurts rates by increasing the supply of Treasuries, and higher supply means higher rates, all other things being equal.

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There was a fresh reminder about Treasury market supply at center stage for this week’s rout.  The 7yr Treasury auction on Thursday was the worst of its kind since its debut in 2009 (a bad auction speaks to an absence of demand, which has a similar effect on rates as an abundance of supply).  Bonds hit their weakest levels of the week/month/year immediately after that, but thankfully appear to have stabilized since then.

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The Treasury auction definitely wasn’t the only consideration this week.  After all, the volatility had already kicked into higher gear last week.  There aren’t any satisfying specifics though.  It’s a combo deal that all speaks to the improved outlook for covid and the post-covid economy. 

There are also some highly technical trading motivations for bond investors that have to do with the changes in the rate landscape.  These can force money managers to make big adjustments to their holdings, and those adjustments often play out in these sorts of “snowball selling” episodes when traders have the same collective realizations.

As for the mortgage market specifically, everything is happening exactly as we said it would more than 2 months ago.  Mortgage rates have increasingly been forced to pay attention to broader bond market volatility.  This week was the best (worst) example yet.  The cushion is deflated, and the mortgage market is no longer invincible.  

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Reasons aside, the big question is whether the drama continues, or the bounce back is just the beginning of a deeper recovery.  While there’s never any way to know for sure, what we CAN know is that our odds (of a recovery) improve as rates move higher.  In that sense, the brutality of the past 2 weeks is one of the best indications of potential support.  While that doesn’t necessarily make a friendly bounce likely, it’s more likely than it was after last week’s big rate spike.

Optimism aside, keep in mind that this is a rising rate environment in general, and we don’t currently have a reason to believe that trend is at risk of dying.  What we’d be hoping for here is a return to a more stable uptrend in rates.  That “return” could help rates move a bit lower in the short term before resuming their gradual uptrend.  Ultimately, it will be up to the course of the pandemic, the economy, fiscal spending, Fed policy, inflation, and other macroeconomic factors to determine the rate range through the end of the year.

Next week brings important updates as far as economic data is concerned.  There will be several reasonably important reports throughout the week culminating in Friday’s all-important jobs report.  

Time to Wake Up To The New Mortgage Rate Reality

There’s no precedent for the winning streak enjoyed by mortgage rates in the 2nd half of 2020. We’ve never seen so many new record lows in the same year, and we never spent as much time at those lows (not even close). All of the above makes it easy to get lulled into a false sense of low-rate security, but it’s time to wake up.

Actually, the alarm has been going off for a while now.  Previous posts pointed out the disconnect between the bond market and mortgage rates on multiple occasions in 2020.  Near the end of the year, we warned against complacency in no unspecific terms.

Following the Georgia senate election, we’ve been tracking a surge in bond market volatility based on the expectation that it would increasingly spill over to the mortgage rate world. 

(Read More: 1/8/21: Have We Seen The End of Record Low Rates?)  

As of this week, that spillover arrived in grand fashion with many lenders quoting rates that are as much as three eighths of a point higher than they were last week.  That means if you were looking at something in the 2.75% neighborhood on Friday, it could be 3.125% today.  What gives?

Again, the upward pressure is nothing new.  Treasury yields have been telling the story since August and mortgage rates have finally used up enough of their cushion that they’ve been forced to follow the broader trends. 

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Why have things been so abrupt?  Using up “the cushion” is one thing, but that alone doesn’t force rates to go higher.  For that, we need “broader bond market volatility.”  In other words, Treasury yields need to be spiking. 

As it turns out, that’s been one of their favorite things to do in 2021.  If it seems abrupt, that has a lot to do with bonds coiling in a conservative pattern heading into the Georgia senate election, and unleashing chaos thereafter.

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The election is old news now though.  It simply got the ball of volatility rolling.  Most recently, plummeting covid case counts, improved vaccine distribution, stronger economic reports, and progress on fiscal stimulus reinvigorated the volatility.  This week, 10yr yields broke up and out of their prevailing “trend channel” (the parallel lines seen below). 

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There’s no magic rule that says Treasuries have to stay inside those red lines, but this sort of breakout can be a cue for traders to intensify selling pressure.  In other words, that upper line was a trigger for yields to move even higher.

“But wait… I thought the Fed said it was keeping rates low for YEARS.  What happened to that?”

The Fed sets the Fed Funds Rates… NOT mortgage rates.  The Fed Funds Rate is a super short-term rate (“overnight,” in fact).  10yr Treasuries, on the other hand, last 10 years.  The average 30yr fixed mortgage lasts between 5 and 10 years depending on the market conditions.  Investors place different premiums on rates with different terms.  Simply put, the Fed Funds Rate is indeed still at rock bottom, but longer-term rates are not.

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This isn’t anything new or different, for what it’s worth.  The Fed Funds Rate has always ebbed and flowed in relation to longer term rates.

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“But wait… I heard that mortgage rates are still really low and that they only went up a tiny amount this week!”

Well, that depends on your perspective.  Is 3.125% still really low for the average 30yr fixed mortgage rate?  Yes!  That was the all-time low before covid.  But is it much higher relative to the past few weeks and months?  Here too, it depends on your perspective, so let’s leave it at this: rates rose more this week than on any other week in the past 11 months.

If you’ve heard that rates only rose slightly, it may have to do with headlines quoting Freddie Mac’s weekly survey.  While that survey is accurate over time, it doesn’t capture short-term volatility.  It also tends to stop measuring most of any given week’s volatility on Monday, and Monday was a holiday!  As such, it’s lagging the reality on the street.  

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On the economic data front, Retail Sales (this week’s biggest report) rose at the 4th fastest pace since records began in the early 90s.  In general, stronger economic data puts upward pressure on rates.

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In terms of housing-specific data, this week brought an update on residential construction numbers.  They’re still stellar.  

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Whereas Housing Starts are subject to weather-related delays and other potential roadblocks, building permits are a bit more free-flowing, and they just set another long-term high.

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When Will The Mortgage Market Actually Care About Rising Rates?

There’s an obvious trend toward higher rates as far as Treasury yields are concerned.  This goes all the way back to August.  

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Treasury yields and mortgage rates historically correlate quite well. But mortgage rates have almost completely ignored that correlation recently.  In fact, most of the 2nd half of 2020 saw mortgage rates fall while Treasury yields continued higher.

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The chart above doesn’t tell the whole story because it uses a separate y-axis for each line. Here’s the same time frame with mortgage rates and 10yr yields on the same axis:

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That still doesn’t tell us much although we can certainly see different patterns.  Here’s another look at the same two rates on the same axis, but this time we’re charting the CHANGE since Jan 1, 2020.  

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This one probably tells the story better than the rest.  Mortgage rates simply weren’t able to drop as quickly as Treasury yields at the beginning of the pandemic and have been closing the gap ever since.  As of late 2020, they finally got on the same page again. 

With that being the case, are mortgage rates now at the whim of the broader bond market?  Yes and no.  The reasons are fairly technical, so they’ll be included as a “nerdy addendum” at the end of the newsletter.  The quick version is that mortgage rates have been and will continue to be less and less likely to defy rising rate trends in the broader bond market.

So should we expect rising rate trends to continue?  Here too, the answer is yes and no, but it’s easier to make a case for “yes.”  Bonds care deeply about the course of the pandemic and the economic recovery.  Covid case counts alone can explain a lot of the momentum in the past year.

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* This was a complicated time frame for bonds.  Markets were already well aware that case counts would be spiking in the winter.  If cases had only risen modestly at the end of the year, bond yields might have actually continued to rise.  But the bigger spike in cases instead helped bonds avoid making new highs for a time.   On a separate note, bond yields were pushed higher in early November due to the presidential election.

** Here too, falling case counts were largely assumed, but they certainly aren’t helping bonds.  The rate spike in early January had more to do with politics (as the GA senate election gave unified control to democrats, thus increasingly Treasury issuance expectations.  Higher issuance = higher bond yields/rates).

But as is always the case with financial markets, if rates were 100% certainly going to be higher, they already would be!

The jury is still out on how the pandemic reshapes the economy.  Will the 10 million missing jobs return in any significant way?  Will inflation actually move above 2% any time soon?  Until the labor market improves and inflation rises, the Federal Reserve will be doing a lot to keep rates much lower than they otherwise would be.  The biggest shocks to the mortgage market are reserved for the day when the Fed begins to withdraw support.

Fortunately, we should be able to see that coming to some extent based on data we know the Fed cares about.  This week’s example was the Consumer Price Index (CPI)–one of the two big inflation reports that come out each month. 

The Fed’s inflation framework suggests the “Core CPI” should be 2% or higher on some reasonably sustained basis.  It was 1.6 last month and expected to drop to 1.5 this month.  Instead, it dropped to 1.4!  Translation: inflation is moving the wrong direction if it’s trying to scare mortgage rates.  Granted, this is just one report and things can change in coming months, but it speaks to a relatively lower sense of urgency until further notice.

Next week brings a market closure on Monday for Presidents Day.  After that, there are several relevant economic reports on tap, with the headliner being Retail Sales on Wednesday.  If the data is stronger than forecast, it implies upward pressure on rates.  Any significant progress on stimulus legislation could add to that pressure.

Now For The Nerdy Addendum!

So why have mortgage rates been able to outperform Treasuries so much, and why might those good times be running out?  

1) Mortgage bonds vs Treasuries. Although mortgage-backed bonds (what mortgage rates are actually based on) tend to correlate very well with Treasuries, that relationship has been more volatile than ever before since Covid.  Mortgage bonds have done much better than Treasuries since September.  When that happens, lenders have more pricing power (i.e. they have room to drop rates or keep them low, even if Treasury yields don’t agree).

Yes, this has helped mortgages outperform, but have we seen the limit of this outperformance?  Charting the spread between mortgage bond yields and Treasuries provides answers.  Outperformance (i.e. the lower the blue line goes) is at record levels.  It will have a hard time moving much lower.

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2) Treasury-specific concerns.  This is more of a sub-component of the previous bullet point because anything that’s bad for Treasuries specifically will also be good for the spread between mortgage bonds and Treasuries.  In other words, “some stuff” is pushing Treasury yields higher, but not mortgage bond yields.  Said “stuff” mostly has to do with large amounts of Treasury bond issuance.

3) Mortgage Lender Margins.  This is arguably the biggest deal here, and perhaps the easiest to understand.  Mortgage lenders simply couldn’t drop rates as fast as Treasuries OR mortgage bonds suggested earlier in 2020.  They would have been overwhelmed, and the rapid refinances of just-issued bonds would have done serious damage to the mortgage market. 

The following chart measures the gap between mortgage rates and mortgage bonds.  The higher it is, the more cushion lenders have.  That cushion can be used to absorb bond market movement that would normally imply higher rates, or it can be used to bring rates lower when the bond market is flat.  Either way, it’s starting to get thin.

Granted, it might look like there is a lot of cushion remaining, but as we’ve discussed time and again, there is a “new normal” that will be higher than the previously normal range.  The fact that we’ve bounced a few times at 1.35 means we might be looking at the new normal. It’s too soon to tell if this will be a new “floor” for the range or just a temporary road block.  

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Super-condensed translation:

  • The bonds that dictate mortgage rates have done amazingly well compared to Treasury yields
  • Mortgage rates have done amazingly well compared to mortgage bonds (after an initial blow-out at the start of the pandemic). 
  • Both factors made low mortgages almost invincible by the end of 2020
  • But both factors are showing signs of fatigue.

Rates Under Pressure Despite Weak Jobs Report

Economic data is traditionally one of the key contributors to interest rate movement. Of the regularly-scheduled reports, none has more market-moving street cred than The Employment Situation–otherwise known as “the jobs report” or simply NFP (due to its headline component: Non-Farm Payrolls).

The relationship between econ data and rates can wax and wane.  Covid definitely threw a wrench in the works, and economists still don’t know exactly how things will shake out.  In general, the market is trading on the assumption that things continue to improve even if the data isn’t making that case today.

In fact, today’s jobs report specifically suggests something quite different.  The economy only created 49k new jobs in January, and the last few reports were revised much lower to boot.  Taken together, these reports effectively put an end to the “correction” phase of the labor market recovery.

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In other words, payrolls plummeted at the onset of covid (“contraction” phase).  They’d been bouncing back in record fashion through September, but have since returned to closer to zero growth.  That’s not great news considering we’re still roughly 10 million jobs away from pre-covid levels.

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Based solely on the data above, interest rates shouldn’t be eager to rise.  A 10 million job deficit is a big deal and it speaks to a level of economic activity that promotes risk-aversion (which, in turn, benefits rates).

But rates have other factors on their mind.  In fact, we don’t even need to move on to other factors to consider one counterpoint.  Simply put, the labor market recovery is still playing out.  While it’s true we’ve seen the big contraction and correction, there’s a lot of uncertainty surrounding the coming months. It’s too soon to declare the death of the labor market based on the past few months–especially when seasonal adjustments are considered.

The following chart zooms in on the monthly job count to show the recent volatility and the normal range for solid job growth.  One could easily imagine returning to that range as lockdown restrictions are eased and vaccine distribution improves.  To a large extent, the bond market (and thus, interest rates) is operating based on its best guesses about the next 6-12 months as opposed to what it mostly already knew about January 2020.  Bottom line: if job growth is going to end up in that “solid range,” we wouldn’t necessarily know it yet.

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Moving on from jobs data, the bond market has other timely concerns.  Next week brings another round of record-setting Treasury issuance.  Treasuries = US government debt.  The more money the government needs to spend (and the less revenue it takes in), the more Treasuries it must issue.  The greater the issuance, the more upward pressure on rates–all other things being equal.  

At the same time, congress passed a budget resolution that paves the way for the $1.9 trillion covid relief bill to pass in as little as 2 weeks.  Stimulus hurts bonds/rates on two fronts by increasing Treasury issuance and by (hopefully) strengthening the economy.  A stronger economy can sustain higher interest rates, in general.  

With all of the above in mind, it’s no great surprise to see a continuation of a well-established trend toward higher yields in 10yr US Treasuries.  The 10yr yield is the benchmark for longer-term rates in the US and it tends to correlate extremely well with mortgages.  As such, this chart would normally be a concern for the mortgage market.

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But as we discussed last week, mortgage rates have diverged from Treasury trends in an unprecedented way.  

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Despite the departure, the point of last week’s newsletter was to provide another reminder that mortgage rates can’t keep this up forever.  Indeed, when we zoom in on the actual day-to-day changes in 10yr yields and mortgage rates, we can see strong correlation again–just with much smaller steps taken by mortgages.

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The takeaway is that it’s no longer safe to bank on a series of increasingly lower all-time lows in mortgage rates.  As long as the broader bond market remains under pressure, so too will the mortgage market–even if it takes less damage by comparison.  If these trends continue, mortgage rates may not rise as fast as Treasuries, but they’d still be rising.

For now though, the sun is still shining on the mortgage market.  Both purchase and refi applications are soaring, and new housing inventory can’t come fast enough.

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Next week’s focal point for interest rates will be the Treasury auctions in the middle of the week–especially the 10yr Note Auction on Wednesday.  Last time around, that auction marked a turning point for a rising rate trend that shared several similarities with the current one.  

How to get the most cash out of your commercial real estate

Commercial Mortage News (What is RSS?)




In order to get the maximum amount of cash out of your commercial real estate, with a commercial equity mortgage loan, you need to choose a type of equity mortgage loan that can ‘squeeze’ the most cash out of your commercial real estate.


Those types of commercial equity mortgage loans include “closed” equity mortgage loans.


If you decide to get a “closed commercial equity mortgage loan” you can get a more cash out of your commercial real estate than you could with other types of commercial equity mortgage loans. How exactly?


A closed commercial equity mortgage loan has a lower rate than it’s opposite, the ‘open commercial equity mortgage loan.’ All “open” means is that you could pay-off chunks of your new commercial equity-mortgage loan, or completely pay it out ‘for free.’ So all “closed” means is that you’d have to pay a “fee” if you suddenly had the inkling to pay-off your commercial equity mortgage loan before your mortgage term was over.


If you choose a closed commercial equity mortgage loan over an open one, you can get a lower mortgage rate. And when you find out from your broker or bank how much smaller that low-rate makes your future ‘mortgage loan-payments’ – you might realize that you can afford to pay more. And if you haven’t already asked for the maximum amount of equity to be taken out of your commercial yet, being able to afford to pay more on your new commercial equity mortgage loan has it’s benefits.


Say that right now you pay mortgage-payments on your current commercial mortgage loan that are $1000 a month, and the broker tells you, because of the low rate of your new closed commercial equity mortgage loan, that you can get new commercial equity mortgage loan payments that are only $800 a month. You’d realize that since you’re paying a thousand bucks a month anyway, that you could get more cash out of your commercial real estate right away, simply by still paying mortgage loan-payments, on your new commercial equity mortgage loan, that are $1000 bucks a month.


So close in on a closed commercial mortgage loan: and reap the rewards of more cash flow from your commercial real estate!


This mortgage news was brought to you by The Mortgage Store Online: a Canadian mortgage brokerage that offers both home and commercial mortgages throughout Canada.

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Home mortgages in a slower Canadian economy: how are people approaching them?

Home Mortage News (What is RSS?)




Despite the slowing of the economy in 2008, and the standstill in 2009, people are still doing research on the internet to learn about mortgages, shop for mortgage rates, and find out if they qualify for mortgages or not.


Joe Janovich, President of the Canadian mortgage brokerage, The Mortgage Store Online, paints a picture of how he sees people are dealing with mortgages and home-hunting in this season: “People are still looking for mortgages: just at a slower pace: they are still doing their research, still looking to see if they qualify for mortgages: but are taking their time with shopping for their homes. It’s the positive side of human-nature that Janovich is seeing in this time.


“Most of us human beings, including our current mortgage-clients, appear to be planning for the future: even though things are slow: and that’s a great approach for everyone to take in hard-times,” comments Janovich.


“That way people are ready and equipped with the information they need to buy homes and finalize their mortgage when the economy bounces back up: they’re utilizing their time well: they’re taking the time to dream about the future: about what they’ll do when the economy has bounced back: I’ve enjoyed noticing this aspect of people’s actions in this difficult time.”


This mortgage news was brought to you by The Mortgage Store Online: a Canadian mortgage brokerage that offers both home and commercial mortgages throughout Canada.

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