Is the Market Different This Time?
Given the number of false starts in recent years, it’s understandable to ask the obvious: Is it different this time, or is it another false start?
More than a couple times in recent history we’ve seen interest rates rise into January and then fall soon after. This time has been different: Interest rates have continued to rise.
But is it really different this time? By “it,” we mean the end of the bull market in bonds that began in 1981? We have to ask again because the punditry that market participants most heed have amplified their concerns. This could be it.
Bond gurus Bill Gross of Janus Henderson and Jeffrey Gundlach of DoubleLine Capital believe rising interest rates are a given following federal tax reform that occurred in December. Lower income tax rates — lower corporate income tax rates, in particular — are expected to stimulate the economy. GDP growth is expected to accelerate (albeit modestly). Bond investors, if they dislike anything, they dislike accelerating GDP growth.
Ray Dalio, CEO of Bridgewater Associates, an investment firm with $160 billion in assets under management, joined the choir this past week. Dalio believes that the bond market has slipped into a bear market — marked by falling bond prices and rising yields. Dalio warned on Bloomberg TV that “a 1% rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981.”
Dalio likely meant a one percentage point rise (not a 1% rise), which would translate to a 40% increase in the yield on the influential 10-year U.S. Treasury note. Rates on 30-year fixed-rate mortgages have historically averaged two percentage points above the yield on the 10-year note.
The percentage increase in the 30-year fixed-rate loan would be less harrowing, though. Yes, quotes of low-fours on a 30-year loan would levitate to the low-fives, but the percentage increase would be roughly 25%, as opposed to 40% for the 10-year note.
Of course, this is all conjecture — on their part and ours. Bulls and bears are seen only in hindsight.
The rising-rate argument is at least sensible, though: Lower corporate income tax rates, expectations for economic growth, Treasury Secretary Steven Mnuchin backing a weaker dollar, and a Federal Reserve determined to reduce its balance sheet and raise interest rates all point to a future marked more with rates rising than one with rates falling.
With that said, we’ve seen a slight easing in mortgage-rate quotes in the past week (some down drift in rates or fees). Could slight easing morph into a sustained downtrend? It could, but the data today suggests otherwise. We view any easing as an opportunity to lock as opposed to a reason to float for better future rates.
Keeping you informed on events this week that may create volatility in mortgage rates.
|Econmic Event||Release Date and Time||Consensus Estimate||Analysis|
|S&P CoreLogic Case-Shiller HPI(November)||Tues., Jan. 30,9:00 am, ET||5.5% (Annualized Rate)||Moderately Important. The Case-Shiller index will likely have risen at a mid-single-digit rate through 2017. The trend will likely continue into 2018.|
|Pending Home Sales Index(December)||Wed., Jan. 31,10:00 am, ET||109.7 Index||Important. A trend has yet to emerge in the index. Existing home sales are unlikely to experience higher growth in early 2018.|
|Federal Reserve FOMC Meeting||Wed., Jan. 31,2:00 pm, ET||Federal Funds Rate: 1.25%-to-1.5%||Important. The Fed is expected to hold the federal funds rate at 1.25%-to-1.5%. Increases likely reside in the near future, though.|
|Employment Situation(January)||Fri., Feb. 2,8:30 am, ET||Unemployment Rate: 4.1%Payrolls: 160,000 (Increase)||Important. More eyes are focused on wage-rate growth, which remains noninflationary.|
A Concern, but Not an Overwhelming One
Mortgage rates are up, and so, too, are purchase-mortgage applications. The Mortgage Bankers Association reports that its seasonally adjustedpurchase index rose 6% last week to mark its fourth-consecutive weekly increase. The index is at its highest level since April 2010.
We’re not surprised activity has risen. When home buyers anticipate rising mortgage rates, they act now to avoid paying an even higher rate in the future. (The reverse holds as well, but to a lesser degree with strong home-price appreciation lurking in the background.) We’re interested to see how the trend manifests in home sales.
The latest data on existing home sales doesn’t tell us much. The data focus on December, and in December existing home sales declined 3.6% to 5.57 million units on an annualized rate.
If we look at the bigger picture, we find a lot to like. Despite the poor showing in December, existing home sales in 2017 were at the highest levels in 11 years. What’s more, it could have been better if not for the dastardly duo — a low supply of homes sale and relentlessly rising home prices.
If mortgage rates relentlessly rise could the dynamic change? Could sales and housing activity slow?
It could, but we expect that it would take time. We still have many positive factors at work — persistent job growth, rising wages, strong corporate earnings, strong housing demand — to keep housing on its upward trajectory, at least for the near future.