Why Are Mortgage Rates Rising So Fast?

Since the end of 2021 mortgage bond pricing is down by 192 basis points and thus mortgage rates have risen by ¾%. Normally a 192 bp increase would mean just a ½% rate increase, but every one of our investors (20+) has raised their rates by ¾% or more. This is surprising to me as my industry is talking daily about margin or profit compression, but I am not seeing this currently when I look at rates. 

Why has this happened? Three primary reasons, the Fed finally admitted that inflation is not transitory before Xmas. This scared bond investors for whom inflation is awful news. Who wants to own a 10 Year T-Bill at 1.50% or even 2% if inflation is 7%? Thus, bond investors are selling and when they sell their assets this extra supply drives prices down and rates or yields rise in response. 

The second reason mortgage rates are rising is the Fed’s ending of purchases of new mortgage bonds as they plan on eliminating these purchases by March. Thus, there is less demand and to attract buyers, prices have to drop and yields or rates have to rise. Bond prices and yields move in opposite directions.

Third, It’s currently expected that by June the Fed will start reducing their purchase of new mortgage bonds through their reinvestments of principal payments received from loan payoffs and principal payment reduction. This amount is currently $60 to $70 billion.  

However, Jumbo loan rates have only increased by .375% this year to 3.25% on a 30- year fixed-rate loan. Why? The Fed is not involved in this market as this market is controlled by BIG banks and REITs and they are more than happy to accept a lower rate of return. This tells me they are not too concerned about higher inflation long-term. 

But, there is good news potentially. Gary Shiller wrote this past week in Barrons that he sees a resumption of “the bond rally of a lifetime” to begin later this year. He like many other top economic minds expects the Fed will throw the economy into a recession later this year as they always start raising short-term rates too late after economic growth and inflation has peaked which causes the yield curve to flatten which is the BEST predictor of a recession. 

Even the Fed itself is very close to predicting a recession normally defined as negative GDP growth for 2 consecutive quarters. Currently, the St. Louis Fed and the Atlanta Fed are both predicting GDP growth this quarter < 0.20% 

Last Friday the 10-Year Treasury Bill ended at 1.92% an increase of 40 bps this year. The 10-Year T-Bill has been below 1.97%, an incredibly strong ceiling of resistance since July 2019. Will the 10-Year T-Bill break above this ceiling? I doubt it will. Plus, the 41-year trend for bond rates has been down, down, down. This is why so many esteemed bond investors don’t believe the 10-Year T-Bill will go above 2% for very long.