Mortgage bond pricing is down about 100 basis points over the last few trading days and the 10 Year Treasury Bill is up nearly ¼%. Why are rates moving higher?
Strong economic growth is expected
Inflation is rising
Tight labor market
The U.S. Treasury is issuing tons of new debt this year
The Federal Reserve is conducting Quantitative Tightening
And on May 1st the Core PCE report is being released and don’t be surprised if this report shows core inflation at or above 2% for the last 12 months. 2% inflation has been the Holy Grail for the Fed for several years and hitting this level of inflation will cause the Fed to more aggressively raise short-term rates. In fact, the Fed Fund Futures market is predicting that the Fed will raise short-term rates 3 more times this year from 1.75% to 2.50%, which would raise the Prime Rate to 5.50%.
I also expect the 10 Year Treasury Bill will finally exceed its very strong ceiling of resistance of 4+ years at 3.04% and once it does we may see rates rise further quickly. It seems nearly inevitable that mortgage rates will finally be > 5%, the question is when? Once this happens I am afraid we may see even fewer homes for sale as buying a new home will become even more expensive for current homeowners.
This weekend I reviewed a 70+ page “magazine” of home improvement ads and I got to thinking. When we bought our home 4.50 years ago this “magazine” was only about 30 pages and was one of only two that we received every month. Now we get at least 5 or 6 of these “magazines”, which tells me that home improvement spending is SOARING! Which means people are making their homes awesome for themselves and they have no plans of moving. That’s not good news for people who want to buy a home.