Mortgage Rates Rise After Chairman Powell Speaks
Fed Chairman Powell rocked the bond world last Wednesday when he said in his eyes the employment situation is all but met and he doesn’t need to see an extremely strong jobs report to begin tapering and the Fed only needs to see a “decent” employment report for September. Thus, it’s now expected that the Fed will formally announce tapering at the end of their November 3rd meeting and will begin tapering in December. It’s expected they will begin reducing their purchases of Treasuries and mortgage bonds by $15 billion in December from $120 billion down to $105 billion and consistently reduce their purchase by $15 billion a month for 8 months to end QE4
Remember the Fed is “buying” $40 billion of mortgage bonds a month under QE4. But, they are honestly buying another $60 billion a month in mortgage bonds “on the side”. What do you mean? With each mortgage payment made by a borrower, and with each refinance, and with each payoff of an existing mortgage by home sale, the Fed is receiving about $60 billion a month in cash which they then are using to buy additional mortgage bonds. In reality though the Fed has been buying $100 billion in mortgage bonds every month for about 18 months. And the Fed has not said anything about reducing their reinvestment purchases; however, this dollar amount may drop as refinancing slows down.
So, how did the bond markets react? The 10 Year Treasury Bill rose just 1 basis point on Wednesday afternoon, but on Thursday the yield rose by 8 basis points to 1.41%. But, something monumental happened that day as the 10 Year closed above its 200 Day Moving Average for the first time since June 16th and this is a strong Bearish Signal for the 10 Year. On Friday the 10 year closed at 1.45% and may be headed to 1.60%.
The 2% mortgage bond dropped in price initially, but then recovered its losses to close with a small gain. Then, Thursday happened…prices dropped by 65 basis points and they dropped through 2 strong floors of support, which is a strong Bearish Signal. Then, on Friday bonds recovered some of its losses by closing up 16 basis points from Thursday. Thus, mortgage rates rose by 1/8% last week. Don’t be surprised if rates rise another 1/8% this week.
Here are Eliott Eisenberg’s predictions for the 10 Year Treasury Bill—
· EOY the yield will be at 1.60%
· By 6/30/22 the yield will be at 1.80%
· By 12/31/22 the yield will be at 2%