The bond market went back to work on Monday.
By Wolf Richter for WOLF STREET.
The 10-year Treasury yield jumped by 8 basis points on Monday, to 4.09%, where it had been on November 20, wiping out in one day the entire decline of last week.
Long-term yields are largely driven by fears of future inflation and fears of future supply of new Treasuries that the bond market has to absorb. The Fed’s short-term policy rates and hopes for rate cuts have little impact on the long end of the bond market.
The Effective Federal Funds Rate (EFFR), an overnight rate at which banks lend to each other, and which the Fed targets with its five monetary policy rates, shows the rate cuts. But it has been drifting up ever so slightly starting in September as liquidity is getting tighter in the market (dotted blue line).
The 30-year Treasury yield jumped by 7 basis points to 4.74%, wiping out more than the drop last week. All year it has remained in a fairly narrow range between 4.5% and 5.0%, only briefly piercing both of them a couple of times.
The 30-year yield is particularly driven by fears of future inflation. Since the first rate cut in September last year – the 50-basis-point monster cut – the 30-year yield has risen by 80 basis points.
Rate cuts by the Fed do not automatically translate into lower long-term rates.
Mortgage rates also jumped on Monday. The daily measure of the average 30-year fixed mortgage rate by Mortgage News Daily jumped by 9 basis points, to 6.31%, also wiping out the drop last week.
The average 30-year fixed mortgage rate roughly tracks the 10-year Treasury yield, but is higher, and this spread varies over time. The average life of a 30-year mortgage is less than 10 years as mortgages get paid off prematurely via refis and sales of the homes (it was about 7 years before the arrival of the 3% mortgages).
The average 30-year fixed mortgage rate is higher than it was before the monster rate cut in September last year.
Here too: Rate cuts by the Fed do not automatically translate into lower 30-year fixed mortgage rates.
These mortgage rates of 6% to 7% are not high by historical measures; they’re only high compared to mortgage rates during the era of QE, which started in 2009. The problem in the housing market is not those historically normal mortgage rates, but the 40-70% home price explosion from mid-2020 to mid-2022, caused by the Fed’s mega-QE that created the below 3% mortgage rates even as inflation was surging toward 9%, which resulted in steeply negative “real” mortgage rates (mortgage rates minus CPI inflation).
These negative real mortgage rates were better than free money and caused the craziest home-buying behavior ever, and home prices exploded — and those prices are the problem in the housing market today: Mortgage Rates Are Not Too High. What’s too High Are Home Prices that Exploded by 40-70% in 2 Years, Creating the “Affordability Crisis”
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