Bad News on Inflation and Mortgage Rates

Our country’s money supply as measured by M2 increased by 26% last year, the biggest increase on record. This huge increase normally would cause high inflation rates; but Americans saved $2.9 trillion last year and personal incomes rose 6.3% in 2020. So, consumers have the money to spend when they are ready. Still we are finally starting to see inflation in the Consumer Price Index which has risen 3.6% (annualized) in the last 6 months. Brian Wesbury, Chief Economist for First Trust Portfolios expects inflation will continue to rise and the Fed will ignore it as they have their head in the sand.

This means long-term rates like mortgages will increase and in fact did so last week after the Treasury auction off a record $126 billion in new debt. Not even the Fed could buy enough bonds to keep rates unchanged last week with all this new supply. And we may soon see Congress pass legislation for another $1.9 trillion to spend that the Treasury will have to issue new debt to create/print that money. So, what do you think will happen to mortgage rates? They are going to rise. And rates always rise FASTER than they fall.

The 2% mortgage bond last Friday closed deep below its 200 day moving average which is a very Bearish signal for rates. The 2% bond closed just above its 38.2% Fibonacci Retracement Level on Friday; but I am worried that prices could easily fall further down to its 50% Retracement Level which is another 46 basis points lower.

Second, the 10 year T-Bill ended last week at 1.21% above its 50% Fibonacci Retracement Level which is a bearish signal as well. I won’t be surprised if the 10 year T-Bill hits 1.37% this week, which is its 38.2% retracement level. Thus, don’t be surprised if mortgage rates rise 1/8% or even ¼% this week.