Real Estate Finance News

Washington, DC-CNN —  

Federal Reserve Chair Jerome Powell doubled down Wednesday on the hawkish view that the central bank isn’t done with fighting inflation and could even implement further rate hikes at its upcoming monetary policy meetings.

“If you look at the data over the last quarter, what you see is stronger than expected growth, a tighter than expected labor market and higher than expected inflation,” Powell said during a central banker panel hosted by the European Central Bank in Sintra, Portugal. “That tells us that although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough.”

Powell said officials haven’t decided how and when they will raise rates again, including if they will hikes rates at every other meeting or do back-to-back rate hikes.

“I wouldn’t take moving at consecutive meetings off the table at all,” he said.

The Fed’s position could mean as many as two more quarter-point rate hikes sometime this year, according to the latest Summary of Economic Projections. But it’s not clear at what meeting officials will vote to raise interest rates, especially given that they won’t learn much about the economy before their upcoming meeting in July.

Some Fed officials have made it clear in recent speeches that inflationary pressures persist, pointing to core inflation, which excludes volatile food and gas prices, not decelerating as fast as overall inflation. At the European Central Bank (ECB) conference in Sintra, Powell echoed that sentiment pointing to services inflation — which includes labor-intensive businesses such as restaurants and health care facilities — remaining stubbornly high.

Powell said part of the reason why Fed officials voted to hold rates steady had to do with the bank stresses that emerged in the spring.

“Part of the decision, in my thinking anyway, was the bank stress that we experienced earlier this year,” he said. “There’s a fair amount of research showing that when something like that happens, bank-credit availability and credit can move down a little bit, with a bit of a lag, so we’re watching carefully to see whether that does appear.”

The Fed’s latest survey of senior loan officers showed that banks were toughening their lending standards even before the bank failures. Powell argued that it’s still unclear whether that intensified after the turbulence in March.

Economists and some Fed officials have said that bank stresses can have the same effect on financial conditions as a rate hike.

This is a good time for homeowners who currently have HELOC’s with balances that carry a high interest rate to either strategize to pay them off or consider converting into a HELOAN with a fixed interest rate before the rates on HELOC’s go any higher.

Posted by Narbik Karamian on June 28th, 2023 7:24 PM

Here is a simple version of how mortgage rates are closely tied to the movement of the 10-year Treasury. Hope you find it informative.

Interest rates are at their lowest when the 10-year Treasury yield is at its lowest.

We saw mortgage rates at their lowest point on  July 8, 2016 when Great Britain voted to leave the European Union. The 10-year Yield hit 1.37%.   

The yield rebounded after Donald Trump won the 2016 presidential election. Investors felt his tax cuts would create jobs and boost the economy. That's when investors switch to stocks and real estate investments.  By the end of December, 2016, the 10-year Treasury yield rate climbed to 2.45 percent. 

U.S. Treasury bills, bonds and notes directly affect the interest rates on fixed-rate mortgages. How? When Treasury yields rise, so do interest rates. That's because investors who want a steady and safe return compare interest rates of all fixed-income products. They compare yields on short-term Treasury’s to certificates of deposit and money market funds. While, they compare yields on long-term Treasury’s to home loans and corporate bonds. All bond yields are affected by Treasury yields since they compete for the same type of investor as the stock market.

Treasury notes are safer than any other bonds because the U.S. government guarantees them.

CDs and money market funds are slightly riskier since they aren't guaranteed. To compensate for the higher risk, they offer a higher interest rate. But they are safer than any non-government bond because they are short-term. Businesses typically store their cash in money market funds overnight. It gives them a safe place to park their excess funds for a little bit of a return.

That's why the precursor to the 2008 financial crisis was September 15, 2008. That was the day a money market fund almost went broke.

Mortgages offer a higher return for more risk. Investors purchase securities backed by the value of the home loans. These are called mortgage-backed securities. When Treasury yields rise, banks charge higher interest rates for mortgages. Investors in mortgage-backed securities then demand higher rates. They want compensation for the greater risk. 

Those who want even higher returns purchase corporate bonds. Rating agencies like Standard and Poor's grade companies and their bonds on the level of risk.  

The U.S. Treasury Department sells bills, notes and bonds to pay for the U.S. debt. It issues notes in terms of two, three, five and 10 years. Bonds are issued in terms of 30 years. Bills are issued in terms of one year or less. People also refer to any Treasury security as bonds, Treasury products or Treasury’s. The 10-year note is the most popular product.

The Treasury sells bonds at auction. It sets a fixed face value and interest rate for each bond. If there is a lot of demand for Treasury’s, they will go to the highest bidder at a price above the face value.

That's because the bidder has to pay more to receive the stated interest rate. If there is not a lot of demand, the bidders will pay less than the face value. That increases the yield. The bidder pays less to receive the stated interest rate. The yield is higher in this case, so it can attract more investors to buying Treasury bonds. That is why yields always move in the opposite direction of Treasury prices.  

Treasury note yields change every day. That's because investors resell them on the secondary market. When there's not much demand, then bond prices drop. Yields increase to compensate. That makes it more expensive to buy a home because mortgage interest rates move in the same direction as Treasury yields. Buyers have to pay more for their mortgage.

Low yields on Treasury’s mean lower rates on mortgages. Homebuyers can afford a larger home with the same income. The increased demand stimulates the real estate market. That boosts the economy. Lower rates also allow homeowners to afford a second mortgage. They'll use that money for home improvements, or to purchase more consumer products. Both stimulate the economy.

When Rates First Fell to an all-time low

On July 8, 2016, the yield on the 10-year Treasury note briefly dropped during intraday trading to 1.37 percent, the lowest in maybe 200 years. In a couple of days, the rate started to move a bit higher. Another similar situation occurred between July 23-25, 2015. Many of our clients were able to take advantage of buying or refinancing during these two times into very attractive rates.

Why was the yield so low? Investors panicked when the jobs report come in lower than expected. They also worried about the eurozone debt crisis. They sold stocks, driving the Dow down 275 points. They put their cash into the only safe haven, U.S. Treasury notes. Gold, the safe haven in 2011, was down thanks to lower economic growth in China and the other emerging market countries.

Investors still hadn't recovered their confidence from the stock market crash of 2008. Also, they were uneasy that the federal government would allow the economy to fall off the fiscal cliff. Add in the uncertainty around a presidential election year, and you had a situation that you hope will never occur for another 200 years.

The yield rose as high as 2.90 percent between May and September 2013. The yield started rising after the Fed announced it would taper its purchases of Treasury’s and other securities. The Fed had been buying $85 billion a month since September 2011. This was part of its quantitative easing program. This was an artificial way of keeping the demand for Treasury bonds strong and allow for the yields to stay low to help the U.S. economy to recover. The Quantitative Easing also kept mortgage rates very low to encourage home buying as Real Estate plays a pivotal role in the economy.

Below is a historical graph of the 10-year Treasury Yield from 1790.

Posted by Narbik Karamian on May 11th, 2018 2:06 PM

Archives:

My Favorite Blogs:

Sites That Link to This Blog:


BeneGroup, Inc.

1999 South Bascom Avenue Suite 700
Campbell, CA 95008