Going to further crush demand for existing homes. Bondholders feel the pain.
By Wolf Richter for WOLF STREET.
Longer-term Treasury yields spiked this morning, on top of the surge since the September rate cut. Spiking yields means plunging prices, and it has been a bloodbath for bondholders.
The 10-year Treasury yield spiked by 20 basis points this morning, to 4.46% at the moment, the highest since June 10. Since the Fed’s September 18 rate cut, the 10-year yield has shot up by 81 basis points. 5% here we come?
The 30-year Treasury yield spiked by 20 basis points this morning, to 4.64%, the highest since May 31 May 30. Since the Fed’s rate cut on September 18, it has shot up by 68 basis points.
So all the bond market needs to get spooked further are more rate cuts?
The 2-year Treasury yield shot up by 10 basis points this morning, to 4.29%, the highest since July 31. Since the rate cut, it has shot up by 69 basis points.
The “yield curve” un-inverted further in another massive leap today, continuing the process of un-inverting, driven by the surge in longer-term yields and the decline in short-term yields.
The normal condition of the yield curve is that longer-term Treasury yields are higher than short-term yields. The yield curve is considered “inverted” when longer-term yields are below short-term yields, which began in July 2022 as the Fed jacked up its policy rates, pushing up short-term Treasury yields, while longer-term yields also rose but more slowly, and thereby fell behind. The yield curve is now in the process of normalizing, with longer-term yields surging and surpassing short-term yields.
The chart below shows the “yield curve” with Treasury yields across the maturity spectrum, from 1 month to 30 years, on three key dates:
- Gold: July 25, 2024, before the labor market data went into a tailspin that has now been revised away.
- Blue: September 17, 2024, the day before the Fed’s mega-rate cut.
- Red: This morning, November 6, 2024 after the election results.
The 30-year yield is now higher than all other yields, and it has un-inverted completely. The 10-year yield is just a few basis points from un-inverting completely.
Note by how far those longer-term yields have risen since the September rate cut (blue line). The yields from 3-years through 10-years have shot up by over 80 basis points since the September rate cut, a screeching-tire U-turn, going down in two months, going back up faster and further in seven weeks, amid huge volatility in the Treasury market.
Mortgage rates too. They roughly parallel the 10-year yield, and they spiked today 7.13%, according to the daily measure from Mortgage News Daily.
Mortgage applications through the latest reporting week, which doesn’t capture the last two days, already dropped further from the frozen levels before, pushing down further the demand for existing homes, which is on track to plunge to the lowest levels since 1995 this year.
For the housing industry, and for home sellers, this U-turn was a painful slap in the face. At this pace, the yield curve will enter the normal range soon – but in the opposite way of what the real estate industry had hoped. It had hoped that the Fed would cause short-term yields to plunge to super-low levels in no time, which would drag down longer-term yields, and mortgage rates would follow.
But mortgage rates had already plunged from nearly 8% in November last year to 6.1% by mid-September this year, without any rate cuts, on just a wing and a prayer, thereby pricing in all kinds rate cuts and whatnot. And since the rate cut, much of the wing-and-a-prayer plunge in longer-term yields has reversed, that’s all that has really happened.
The real estate industry was expecting 5.x% mortgages by about right now, and they were already close in mid-September with 6.1% mortgages, and some were talking about 4.x% mortgages just in time for spring selling season, and today they’re looking at 7.13% mortgages.
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Are we on recession watch now that the curve is uninverting. Tariffs, mass layoffs of government employees… will also play a part, but I’m feeling it.
We’ve been on recession watch here since mid-June 2022, and it has been fruitless. The yield curve is un-inverting the wrong way, it’s un-inverting with longer-term yields spiking on inflation fears driven by high demand.
This is not a recession-fears un-inversion, where short-term yields plunge a lot for a long time, below long-term yields that also drop but more slowly, as the Fed cuts policy rates in big junks, by 50 basis points and 100 basis points into a recession. Now the Fed is cutting (more slowly going forward) into above-average economic growth and re-kindled inflation.
I think things may look different as higher long term rates are accepted as here to stay.
But correlation is not causation, I agree with you generally that the yield curve isn’t the recession indicator it used to be, it may just be coincidental this time.
So it sounds like you agree that they have to let inflation run a little hot. Treasury yields will be such that nominal returns with be weak, and real returns will be negative…
Lovely.
“…as the Fed cuts policy rates in big chunks, by 50 basis points and 100 basis points into a recession…”
Wolf, “everyone” (so they say) is pricing a near-certainty Fed will cut another 0.25% tomorrow. Cutting 0.75% in less than 3 months seems either panic (thinking the economy will tank) or recklessness (thinking inflation is vanquished).
What do you think is their argument/thought process here?
Nice! The sooner and higher rates rise the better.
Yet 24 of the larger Central Bank have cut rates while only 9 have raised over the past few months. All the countries who have cut have seen big drops in CPI YOY.
I just read an article that provided a list of 36 countries that have deflation or dangerously low inflation. Thus there are more countries on this list than countries with good growth and high inflation.
I am not sure what to think. Maybe the US is just so much more economically healthier than most other countries. Most of the 9 countries that have hiked are having currency issues. A few countries with strong economies driving up inflation and that hiked rates are India, Japan and Australia.
“…or dangerously low inflation.”
🤣 like “a “dangerously beautiful day?”
The stuff people concoct is sometimes just funny. Many goods prices have dropped/plunged = deflation in goods = a great thing because people can afford to buy them more easily. And prices are still very high.
Amen.
I have been curious as to how the yield curve would un-invert. Would the short end stay at 5-6.0, with yields going higher further out the curve, or would the short end just drop (seemed impossible considering the coming issuance)?
Looks like it will be a combination of lower yields on the short end and higher yields on the long end (thanks for the data Wolf).
So, now that Trump is president, and he insists that taxes won’t go up, how is Uncle Sam going to fund it’s budget AND service the debt? Where is the break-point in terms of the ten-year? That’s what I want to know. At a minimum, I see an inflationary recession, unless CONgress actually balances the budget… Thoughts?
MMT will save the day. But it’s only 1 day after the election. 2 months to inauguration. No idea what Trumps actual government will look like or what policies will actually turn into practice or to what degree the machinery of government will implement them. I think the only thing we can say for certain is that Trump favors production. Thats not nothing, but will it be enough. To the degree that credit is a confidence game, Trump today appears to be good for confidence. Tomorrow ?
I have perhaps a silly question. Are Treasury yields heavily dependent on the Federal Reserve interest rates, or are they determined based on other factors? It seems like Treasury yields rise even when the Federal Reserve rates decrease, but there is also some correlation between the two?
Short-term Treasury yields (1-month through 6-month) move with expected Fed policy rates within their maturity window for most part.
Long-term Treasury yields (esp. 10 & 30 years) move with inflation expectations and supply expectations (funding of government deficits). Lots of inflation and lots of supply is a toxic mix for the bond market. That’s what gave rise to the bond vigilantes in the 1980s – 1990s. They scared the bejesus out of the governments at the time, which finally led to a halfway decent budget.
And as I understand it, unlike the 80’s and 90’s, banks no longer really have control to set the mortgage rates since the paper is now packaged and sold as MBS on the secondary market. And that market, which competes against the 10 year treasury yields, is the one that effectively sets mortgage rates. Please correct me if my understanding is too simple or needs adjustment.
My namesake trade continues to outperform. Here we go 5% 10-year!
Everything is fine, get your spacesuits ready and make sandwiches for the trip!
Although differences are present (and I don’t want to jump to any conclusions), similarities are also present between today and Black Monday in October of 1987. The 10 year treasury rate rose from approximately 7.3% in 11/86 to almost 9.4% in 9/87, a 200+ BP increase over ten months or roughly 29%. The DOW, which was considered overvalued in 1987 reached roughly 7,300 in 8/87 and then corrected in a violent manner in October 1987 and settled at 5,000 in 11/87. Yes I realize other problems were present in the stock markets before Black Monday but one that seemed to be shrugged off was the rapid rise in interest rates over that 10 month period.
Today, as WR has clearly pointed out, the 10 year treasury has risen from roughly 3.66% in 9/24 to 4.46% today, an 80 BP increase or roughly 22% in just two months. The 30 year is displaying the same trend.
What is critical to understand is that long-term US treasury rates are used as a basis to value a wide range of assets ranging from bonds, to real estate, to stocks, investment annuities, and other assets. The higher these rates move, the more impact it will have on asset valuations, especially assets that are valued based on cash flow streams that are further out into the future. Unless cash flow streams (i.e., future earnings) can increase at a quicker rate than the negative impact caused by increasing long-term interest rates, eventually, asset values will be reset which as we’ve seen historically, can be a violent process.
Please note that I’m not predicting a stock market correction/crash but if, as WR mentioned in his article, 5% 10-year treasury rates are realized (and then subsequently increase from this point), there’s going to be a collision that needs to be sorted out in the markets. WR has clearly documented this is already occurring in the residential real estate market as higher interest rates are killing demand. The solution, as noted by WR is simple. Lower prices.
We’ve already seen significantly lower prices realized in CRE (especially office) with weakness in prices beginning to show in residential real estate markets. Bond values/prices are now under pressure (especially the long-end) so it would appear that the stock market is the last one to get the message (which is usually the case).
From my perspective, long-term interest rates are the key as if these rates continue to increase at relatively rapid rates, pierce the 5% level, and continue their ascent, I’m not sure how the stock markets can diverge from this trend over the long-run.
BTW, it looks like good old Mr. Buffett appears to be ahead of the game again. Record cash/ST treasury positions, heavy liquidation of certain stocks including Apple and BOA, waiting like he always does, for the market to clear and stocks to reset to more reasonable values.
Yep. I am of a like mind. Some companies are undervalued, mostly in the ag and commodity space. I am buying these, but that’s about it.
Ummm the S&P climbed a ton today. 137 points and counting. I mean holy batman that’s good!
I think from just relief that indecision 2024 is over.
Your Dow numbers for 1987 look way, way off.
some random thoughts.
the stock market definitely doesn’t get it based on 203% of gdp. that’s basically zirp and qe level valuations, and there is qt and a fed funds rate of 5%.
70% of people polled yesterday said the economy was bad. this should lay rest to the bs from wall street that americans feel good about the economy when the stock market is up. they don’t.
Not similar at all to Black Monday. Greenspan just tanked reserves during contemporaneous reserve accounting.
“….if, as WR mentioned in his article, 5% 10-year treasury rates are realized (and then subsequently increase from this point), there’s going to be a collision that needs to be sorted out in the markets. WR has clearly documented this is already occurring in the residential real estate market as higher interest rates are killing demand. The solution, as noted by WR is simple. Lower prices.
We’ve already seen significantly lower prices realized in CRE (especially office) with weakness in prices beginning to show in residential real estate markets. Bond values/prices are now under pressure (especially the long-end) so it would appear that the stock market is the last one to get the message (which is usually the case).”
INDEED!
Quote from Trading Places maybe? Randolph Duke “If Mr. Beeks does what we paid him to do, we should have a very happy New Year”, Mortimer Duke “Indeed”.
Indubitably!
All tweaks, twiddles, and toying with economic inputs, outputs, and impressions must be absorbed by the systems at work in the economy.
We have yet to see the end of this session of fiddling and it will take more time for it all to be absorbed. Its unlikely to be fully comprehensible before the new team starts fiddling again.
Keep your eyes on the assets in which you invest and let those determine your fear and invest accordingly. Everything else is noise.
Seems like we are heading back north with long interest rates. What will the FED’s next move be with fed funds rate cuts?
Will they just blow this situation off as a one time event caused by election afterbirth or start raising rates again in anticipation of rising inflation?
Or will they just sit tight?
“Long-term Treasury yields (esp. 10 & 30 years) move with inflation expectations and supply expectations (funding of government deficits). Lots of inflation and lots of supply is a toxic mix for the bond market. ”
Wolf, based on your statement the only way to suppress the long end is for the Fed to go back to QE (as before). The balance sheet is at 7.5 trillion. How much room do you honesly think is left for another round of QE before the whole thing might potentially blow up for US debt?
I believe you mentioned the balance sheet would settle around 5 trillion, but I wonder how high it can go before serious dislocations.
“the only way to suppress the long end is for the Fed to go back to QE”
NO, that’s perverted wishful-thinking BS. Because under QE NOW, inflation would completely blow out, and then you have 10%-plus inflation and an economic and political nightmare. Americans HATE HATE HATE inflation. EVERYONE knows that except you?
Rising long-term yields will tamp down on inflation, that’s what is needed. And it’s what is needed for Congress to start dealing with reality. It’s a good thing, it’s what this nation and economy needs.
Apparently Americans abhorrently despise egg and milk prices to rise.
If that was not obvious, at sunrise today it was.
sobering
The Fed won’t need to suppress the long end as long as there’s an orderly rise in yields. And if yields spike, they have other tools to deal with it.
Lack of demand for Treasuries is a self-solving problem because eventually the yield goes high enough to bring back demand.
Mr Market must be confused by all the disinformation.
1M QQQ is giggling.
Annuities are about to start looking very interesting.
Can anyone explain why there was an overall decline in yields between July 2024 (Gold) and September 2024 (Blue)?
Also, did the inverted yield curve also steepen during that time and if so, any ideas why? It looks like it did a bit based on the graph.
Bond traders positioning themselves for Fed rate cuts.
Nothing goes to heck in a straight line, as Wolf says.
“why there was an overall decline in yields between July 2024 (Gold) and September 2024 (Blue)?”
Because markets were pricing in a gazillion big fast rate cuts to respond to a crashing labor market and inflation heading to and staying at or below 2% for the long-term. Those themes have now been obviated by revised data and new data. It was a market move like so many market moves.
Makes sense as a reaction to Trump. Potential tariffs, tax cuts, his desire for a booming economy, a reduction in immigration, all inflationary to an already strong economy. There will be some spending cuts, but unless they’re planning on taking an axe to defense or social security spending, it’ll never be enough. Rates will have to compensate.
we haven’t even seen the updated mortgage rates for today. they will be significantly higher than 7.13%, i know because the 10yr was up quite a bit and the national mortgage rates avg gets posted at 4pm eastern.
If rates don’t start moving down quickly. we are going to see a complete halt in construction for residential and for multifamily in the sun belt. we already have declining rents and building inventories.
last 2 recessions began with construction layoffs spiking if I remember correctly.
Really glad to see higher rates on longer term bonds, way overdue. Great job Fed with the counterproductive rate cut in September /s