How the yield curve is un-inverting shocks real-estate folks who’d promised rate cuts would push down mortgage rates even further.
By Wolf Richter for WOLF STREET.
The 10-year Treasury yield jumped today by about 12 basis points, to 4.20% at the moment, the highest since July 26, up by 55 basis points from September 17, on the eve of the big-fat rate cut, when the 10-year yield had bottomed out at 3.65%.
Today’s action may have been driven by hawkish commentary by Dallas Fed president Lorie Logan on the future of the Fed’s QT (article coming), by renewed fretting about inflation, and by concerns about the recklessly ballooning government debt that would pile up new supply, or by whatever.
Markets move in a mysterious way, and the “why” may remain elusive, but we do see the outcome, and we know that QT, inflation, and supply are the triple enemies of bondholders (blue = effective federal funds rate which the Fed targets with its headline policy rate):
Mortgage rates, oh my. There goes the housing market, what’s left of it. The daily measure of the average 30-year fixed mortgage rate jumped by 14 basis points today, to 6.82%, the highest since July 26, and up by 71 basis points from the eve of the Fed’s mega rate cut.
At the time of the rate cut, this daily measure of mortgage rates by Mortgage News Daily had dropped by 187 basis points from the peak in October a year ago, to 6.11%, on just a wing and a prayer, having priced in 2% inflation forevermore and many rate cuts.
So now, with a 50-basis point cut under the belt, and with smaller fewer cuts being outlined for the future, and with CPI inflation having risen on a month-to-month basis for the third month in a row, it’s time to unwind some of the exuberant craziness?
The 6-month yield and 30-year yield un-invert. The 30-year Treasury yield today jumped about 11 basis points to 4.50% (red), now matching the 6-month yield (blue). So this is another piece of the yield curve that has now un-inverted.
Normally, the 30-year yield is far higher than the 6-month yield. But in July 2022, with the rate hikes pushing up the 6-month yield, and the 30-year yield following more slowly, the pair inverted when the 6-month yield became higher than the 30-year yield. Now the pair has un-inverted.
This came as a shock to real-estate folks who’d promised lower mortgage rates once the rate cuts start, as the rate cuts would drive down mortgage rates even further. They’d hoped that the yield curve would un-invert with short-term yields plunging on densely-spaced monster rate cuts, and long-term yields falling more slowly but still falling a lot.
Instead, the yield curve is un-inverting with short-term yields falling with the Fed’s rate cuts and dialed-back expectations of rate cuts, while long-term yields are rising on inflation fears, Qt, and the dreaded onslaught of supply of new debt to fund the huge and reckless deficits.
Only the Treasury yields in the 3-year to 5-year range were still below 4%, by just a hair.
The 1-year yield rose to 4.25%, as the Treasury market has been backpedaling on rate-cut expectations. Since September 24, it has risen by 37 basis points.
The 2-year yield jumped 7 basis points to 4.04%, the highest since August 19. But it has roughly been in this range since October 9.
The pair of the 2-year yield and the 10-year yield had un-inverted on September 6, at the time because the 2-year yield had plunged amid rate-cut-mania and continued to plunge until the eve of the actual rate cut. Since then, it has risen by 48 basis points.
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Still don’t feel bad for real estate agents. It always was a lucrative business with little in needed skills except smiling and talking about bonus rooms and granite counters and such. The good ones hopefully banked a lot and have all the same skills to sell used cars so opportunities abound.
They get paid because of having to deal with people like you.
They sure are entitled.
Entitled to favorable government policy, favorable fed policy, favorable tax policy, etc.
Don’t forget me, I am a pain to deal with too!
Agree. Same for the car salesman. Mostly, good human beings, just working to make a buck. Like most jobs it was essentially a
Dispassionate promotion of an inanimate object for money. The current American business model.
Yeah, and they can have someone else flip the best house or used car deals they have been saving for them…..no dirty fingers!
A good hustler can always find someone to screw.
In fact, a friend once gave me a porno tape that had this real good looking real estate sales lady…..Honest!
Well, NBAY, I don’t know where to begin to dissect the issues that you have.
As a first stab, I sense that you hate yourself, for whatever reason. It happens.
Just to remind everybody that statistically, love is the human emotion that wins 78 or 74 pct of the time.
The great ones cashed out and sold their brokerage last year and retired. Now I just T-Bill and Chill (trademark pending by Wolf).
Now your dogging on car salesmen as well? Forgot who’s writing this article have you.?
Try selling a house in this climate, or even getting a client to sell a house to. Your own gas, months without a pay check, dog turd clients to deal with. Hard to live without a pay check..
We could see rates at 8% next year. I surmise, after discussing with the Great Mephisto, that will rip a new one in real estate home pricing nationwide.
Fingers crossed.
Have to wonder… Did they do the rate cut to try to get EFFR to be a smaller hurdle for long bond rates to get over?
We’ve all been scratching our heads thinking, ‘Why the hell did they cut???”
Maybe that’s why?… Wolf, any thoughts on that?
They cut because of suddenly spooky labor market data that came at a time when inflation was far below policy rates, so they could cut to protect the labor market.
But two weeks after the rate cut, the spooky labor market data was revised upward and away, consumer income and the savings rate going back years were revised up, GDP was revised up, spending was revised up, retail sales were revised up…. Two weeks after the rate cut, the revisions and new data showed that the economy is in solid shape and inflation might be on the upswing.
I summarized this situation here: it will answer your question why they cut and how things changed since then. So do read it:
https://wolfstreet.com/2024/10/13/what-if-theres-no-landing-at-all-but-flight-at-higher-speed-and-altitude-than-normal-with-higher-and-rising-inflation/
Good, now we just need to see this uptrend momentum continue to last beyond the next Spring season. The longer this can last, the more chance that it will break this Mexican standoff from the sellers. Certain markets already cracking so this is a step in the right direction. For more hubris markets like the one I am in, demand still needs to come down quite a bit more and more sellers get more desperate. I think quite a few out here think they can pull the same trick of pulling the listing and hoping for a better time to relist, since this rate-cut narrative so far is falling apart, I think their next magical bullet will be seasonality and pinning it all on Spring…
Btw, glad Wolf keeps us informed on this stuff compared to some MSM, was listening to NPR the other day and they were talking about how the housing market is frozen…etc…not once did they mention rate cut doesn’t directly affect mortgage rates. Instead, they were busy asking and coming up with some excuses as to why we haven’t seen mortgage rates drop. If normies are listening to that kind of information, I can see why people continue to pin mortgage rates drop to FED cutting rates..
Sellers giving in, one hearse at a time. I watch for the old made in USA craftsman tools at the estate sales.
20% mortality rate for 70 year old home owners, too!
The sellers who are smart and get out now are leaving in limousines. The hearses will be reserved for those who chase the market all the way down, stubbornly refusing to give in to the reality that their asking prices are too high.
Phoenix_Ikki,
Will be interesting to see how this hits California versus the nation. While home ownership has stayed relatively constant in the US as a whole it has slipped over the decades significantly in California, especially among younger people. No doubt it will move just because some people have to sell or people decide to sell vacant houses but doesn’t feel like it is going to suddenly make things affordable, except of course where housing in relatively reasonable in the state already. My friends live in SD in a nice neighborhood about the size of my house but next to a freeway and it is worth 3X the cost of my house. That said, San Diego is not Sacramento so I can see the premium!
No one ever said San Diego or SOCAL in general will be affordable. But home prices doubled in certain parts of SD from 2020 to 2022. The issue is can those prices sustain when rates are now 2x to 3x higher than 2021 QE era.
For example, my neighbor bought his house for $1M at 2.75% in 2021. The house next to us is listed for $1.6M and rates are ~6.5%. The payment would be more than double what my neighbor pays. No takers yet. But lots of the RE invested people in SD were/are convinced the next boom is just around the corner and it will be $2M for a house in the suburbs that’s east of the I-15.
Does the bond market know more than the Federal Reserve and the National Association of Realtors…. Sure looks like it!
Morgage lenders may be short of funds. My understanding is that a lender does a morgage and then sells it to Fannie. Repeat. Since Fannie is in conservatorship the flow may have slowed down. Raising rates is one way to throttle back demand to match funding.
Mortgage rates are based on the yield of 10-year US Treasuries plus around 2% to 3%. At 3% that would put mortgage rates at 7.20% and they are now 6.85%. Those numbers have nothing whatsoever to do with demand for housing.
Wolf, today I heard on CNBC that in the next 3.5 years, there will be $15 trillion of debt that will need to be refinanced. If we keep adding $2 trillion in new debt on top of that, what do you think that would mean for the yields?
Also, Goldman came out with a forecast today that in the next decade, there will be a sluggish return of around 3%. I feel like there is probably a correlation between those two.
Lastly, aren’t we at the beginning of an AI revolution that is expected to transform our economy, accelerate growth, and make everything much more efficient? Isn’t that contradicting somehow?
Up, up, and away!!!
In Canada I just made a quick search. Mortgages: 5y fixed at 4.34%, 10y fixed at 6.19%. A bit odd that the 10y is quite bigger (or 5y quite smaller)?
Seems correct, the lender is committing to a term 2x longer at a fixed rate, the borrower is securing a rate for 2x as long, you don’t think there should be a premium on that? If it was reversed nobody would be getting a 5yr mortgage
Sure, 10y should be bigger. But by 2%? That would imply that between year 5 and 10, the inflation/interest rates expected to go up a lot. The 10y-5y Canadian bonds do not have much difference, I guess like 0.5%. The debt seller would love the 10y rate, but the buyer could instead do 5y twice. Just looks like there is a hight risk premium for what comes after 5y.
In Canada, the size of the 10-year mortgage market is tiny. Only about 5% of mortgages are 10-year. Lack of competition explains a portion of the premium.
Thanks for the great update. LT rates are going higher. By design IMO. Forcing financing costs higher on housing, credit cards, auto loans will slow (or in the case of housing) end inflationary pressures. Powell needs inflation to cool. Yellen needs cheaper borrowing ST. And she needs higher yields on LT so her bonds are bought. Look at the 30 year chart.
Is that a bull flag forming? I think it well could be. If so, well that will change things up.
One Builder (there are several in the area) of new starter homes in my immediate area has just dropped the price of NEW homes under construction 10% across the board and is offering a 3.99% interest rate buydown for two years, then going to 6%.
I got the “Blowout Sale” flyer in the mail over the weekend. These are homes that run from 1,200 – 2,900 sq. ft. @ around $175/sq. ft.
TLT to $85.
I’m literally betting on it…
I rather have $ under my mattress than TLT.
Looks like the Fed whiffed it on this rate cut and is going to go back and increase rates again to give the market confidence that inflation really will go down and stay down. Right now obviously nobody believes that it will.
I assume you’re being sarcastic. The fed only makes drastic moves like that when it’s bailing out the markets. When it comes to inflation it’s more of a wait and see and maybe half ass it later kind of thing. Which is exactly why nobody believes them, nor should they.
Anon,
The Fed raised interest rates far higher and faster (including three 75-basis point hikes) than anyone thought it would (Goldman said in the spring of 2022 that rates would max out at 2.5% in 2023), and kept them there far longer than anyone thought they would (15 months of wait and see), and it has reduced its balance sheet far more (so far by $2 trillion) than anyone thought it could, and it’s still reducing the balance sheet despite the rate cut and despite some banks that blew up. Is that eager ignorance I hear dripping from your comment?
“Looks like the Fed whiffed it on this rate cut”
Yes.
“and is going to go back and increase rates again”
No.
Last Yankees-Dodgers World Series was 1978, the 10 year yield was 8.5% and headed higher. A foreboding message? Heck, that’s as good an indication as anything else. I do know that something has to happen sooner or later to take the air out of all the egregiously reflated bubbles.
The last Wankees/Doggers World Series was in 1981, is that I think you meant.
The crowd wildly shouts in the Colosseum: “Volcker, Volcker,” as the gladiator is unshackled to challenge the Dragon of Inflation.
It seems that the Fed is finally losing control of the bond market. The amount of new QE needed to suppress the bond market would be just too great given the 1 trillion the government borrows every 100 days. This is on top of maturing bonds than need to be rolled over.
Powell is absolutely complicit in this. He lit the fire and now he pretends to be a firefighter.
P.S. Perhaps the bond market is smelling a Trump victory, who is already promising all kinds of tax cuts.
What would federal tax cuts do except to make the federal deficit and debt that much greater leading to even higher interest rates and yields on US Treasuries of all durations?
There’s a part of me that loves to see it. The hubris of these people is just unreal.
The bond market is smelling the three headed bond slayer: inflation, QT, and increased supply – just as Wolf mentioned.
Both candidates are inflationary and will increase the deficit.
TGA liquidity drain coming soon to a bank near you…
Not just tax cuts but tariffs, which are also inflationary.
The federal debt will eventually have to be faced squarely in the face. A day of reckoning is at hand.
The bankers want rates that’ll support Wells Fargo and Citi; the stock market boys want rates that’ll buoy a bull run forever; the average citizen wants not to pay taxes that’ll diminish the size of the yearly deficits … and yet, they can’t all have what they want.
It may be that Japan defaults first. They already have the highest debt-to-GDP ratio of any First World nation. That could trigger a domino effect of collapsing houses of cards as government after government throws up its hands and says it just can’t afford to pay any more, ending with the cities of North America defaulting on *their* debts …
It all looks grim. I have more to say. For more thoughts on business, go to: dark.sport.blog …
LOL. Again! No country can ever default on debt issued in its own currency. Even Argentina didn’t default on its peso debt. But it defaulted multiple times on its foreign currency debt issued in USD and EUR. Japan will never ever default on its yen debt, the US will never ever default on its USD debt. What can happen though is higher inflation. People keep fretting about the impossible (because stupid is more fun?) and ignore the thing that is already happening.
Talked to a commercial real estate lender today, during the convo they casually mentioned that a lot of their clients were doing shorter terms because obviously rates would go down and they could just refinance in a year or two. Not the first time I’ve heard this from industry people lately, but it’s becoming funnier and funnier to me every time I hear it especially over these past few weeks.
Everyone and their brother is long bonds right now. Feels a bit bubbly just like the stock market.
Short TLT has been a great trade in the last couple sessions.
I wouldn’t buy it but I wouldn’t short it now. If it went back to the low $80’s that would probably bring in buyers. It can’t go to zero. I’s not the kind of asset that could go down a lot, although it’s not out of the realm of possibility. In 2020 oil futures went below zero, so anything is possible. There are many stocks out there that could get absolutely annihilated.
It won’t last long before the interest rates decline again. As you said
Markets move in a mysterious way,