Why are Mortgage Rates Rising?

Since last Tuesday the 2% Mortgage Bond has lost 120 basis points in price and rates have risen by ¼%. The 10 Year Treasury Bill yield has increased by 23 basis points to 1.15%, the first time above 1% in several months. Why?
Mortgage Bankers Association Chief Economist Mike Fratantoni said, "The prospects of increased spending and deficits will likely put upward pressure on mortgage rates as the year progresses."
Capital Economics believes that that the 10 Year Treasury Bill yield will remain near 1% this year and next. Why? They said, "the U.S. is unlikely to see substantially more fiscal stimulus due to Democrats' slim lead in both houses of Congress.
Next, Kiplinger's, whom I have been subscribing to for 30+ years, is now predicting higher inflation and higher rates after the Georgia Senate election. They are predicting that inflation will hit 2.2% by end of the year and the 10 Year T-Bill will be at 2% by end of the year and that mortgage rates will hit 3.5% by end of the year. And remember a 1% rate increase is equal to a 11% HOME PRICE INCREASE. Thus, if Kiplinger's is correct waiting to buy a home in 2021 makes no sense.

I also read articles from 4 brilliant people this past weekend. One of my favorite reads is always Louis Gave, CEO and founder of Gavekal Research. Here are some highlights from an interview conducted with him early last week-
He says, "There are 3 key prices in the world economy: 10 Year Treasury yields, oil and the Dollar. Yields are rising, oil is going up, and the Dollar is dropping. Louis said, "Rising interest rates and a falling currency is a signal that investors are getting out...and the U.S. is starting to act like a sick emerging market."
The Dollar has fallen because our debt increased by $4 trillion with "zero new productive investments," says Louis. And because the Dollar has fallen interest rates will have to increase.
Mr Gave believes that the 10 Year T-Bill could hit 2% this spring as inflation will come back with a "vengeance" and if it does the Fed will be forced to use Yield Curve Control and he believes the Dollar would then drop by 20% and gold will thrive.
One reason why he believes inflation will roar back, "Now we have moved to a world where safety of delivery matters most, even if the cost is higher. This is a dramatic paradigm shift."
And with oil prices below $50 a barrel the U.S. will become an oil importer again which Louis says is bearish for the Dollar.

Anther expert I love to read is Mark J. Grant, Chief Global Strategist at B. Riley Financial. Recently named a "Bloomberg Prophet," one of fifteen, globally. Here are some highlights from a short paper he wrote last week-
There is already $18.1 trillion in negative yielding debt and he believes "there is a very good chance that the U.S. will join this club." Why?
"The Fed will be under political pressure that is going to come from the new administration, as they ratchet up the nation's debt." The Fed will be forced to print more money and to drive interest rates lower as our debt levels continue to increase. If interest rates were to rise we won't be able to repay our debts.
Next, I love reading Logan ohtashami from Housing Wire as he is an economics and data geek to an even greater extent than I am. Here are his thoughts as of last week-
He thinks that a stock market correction could be coming soon and I have been thinking this too for several months now. In fact, I have read that the stock market may sell off by 20% or as much 60% this year. And if this happens Logan believes the 10 Year T-Bill will drop to 0.62% and that mortgage rates could drop to 2.25% to 2.375%.
"Mortgage rates should rise over the year as the economy achieves better footing. As more and more people get vaccinated and COVID hospitalizations fall, we can expect an improved employment picture. A high-level range for mortgage rates should be between 3.375% and 3.625%. I agree.
Logan said, "I can't see mortgage rates going over 4% or the 10 Year yield above 2% while dealing with COVID. Agreed. One thing I have thought about is how will consumer spending respond to reaching herd immunity? Will we start spending like "drunken sailors" again or have new habits been created that will restrain spending? If we spend again like "drunken sailors" the Velocity of Money would increase substantially and this along with a strongly growing money supply could lead to much higher inflation by the end of the year and thus mortgage rates could be over 4%.
Finally, Barry Habib from MBS Highway just released his predictions yesterday. He believes Treasury yields and mortgage rates will continue to rise, but later this year both rates should drop. Why? Additional debt in the medium and long-term always leads to lower long-term rates as the debt payments suppress economic growth. Barry also mentioned the fact that Janet Yellen the new Treasury Secretary loves more spending. Thus, we may see national spending and debt accumulate at a record pace this year.

Finally, Fed Vice Chairman Richard Clarida last Friday said that he expects the Fed will maintain its current pace of bond purchases through this year. He said, "We want further progress in the labor market and moving toward our 2% inflation objective," before they begin reducing their purchases. It will be interesting to see if the Fed increases their bond buying this week in light of what happened in the last week.

So, Treasury yields and mortgage rates may be incredibly volatile in the first quarter and bond traders and investors will react to any news from Congress, our new President, the Treasury Secretary or the Fed. I expect long-term rates will rise until the stock market corrects or sells-off and then mortgage rates should drop until we reach Herd Immunity. Then, rates may increase again.