Mortgage Market Update – October 2nd, 2018
FOMC Update
Hi guys! So, last week was a big week with the FOMC meeting representing the biggest risk event that markets were paying attention to. In a widely expected move, the members voted in favor of raising the Fed Funds target rate by 25 basis points to 2.25%. This is the eighth increase in this tightening cycle and the 3rd so far this year. The policy statement did not offer too many surprises, and the chart of forward rate projections suggest one more 25 basis point raise later this year and then at least three more in 2019. As I am sure you guys know, this policy decision does not mean that mortgage rates are now 25 basis points higher. The Fed controls the overnight rate at which banks lend to one another, so the rates at the very shortest part of the yield curve.
Mortgage rates—at least your standard Agency mortgage rates—are dependent on how mortgage-backed securities are trading. These bonds are more influenced by activity at the longer end of the curve like the 7yr and 10yr spots. Since the FOMC meeting came and went pretty much as expected, longer-term rates actually fell subsequent to the meeting’s conclusion. This is a good thing because, in the days leading up to the meeting, the 10yr yield had moved back to the very top of the recent range, challenging the high closing print of the year near 3.11%. Additionally, you will recall me discussing in prior market updates that there is this multi-decade downward sloping channel that has defined the bull market in rates dating back to the late 1980s. The 10yr is now back above that channel. I believe we need to see a move lower in rate—and quickly—to keep this bull run intact.
Global Events and Analysis
Unfortunately, that is not what we are seeing to start this week. The weekend announcement that the United States and Canada have come to an agreement on trade, and Canada will be making the bi-party deal between the US and Mexico a triparty affair has bolstered a risk on sentiment. Equities were well bid in the pre-market trading session and yields have moved higher by 1.5 to 2.5 basis points. There are a lot of things going right for the US economy right now, so it is difficult for me to name a catalyst that will take rates materially lower in the short term. The employment picture has been extraordinarily robust, and I am not betting that this week’s payrolls data is going to help much. However, structural issues remain in the global economy that should temper some of the current optimism. While the US has come to trade terms with Mexico and Canada, it is still very much at odds with the Chinese who are our largest trading partner by far. Also, don’t count out the usual suspects of market disruption—unsustainable debt burdens for some of the peripheral EU countries, Brexit negotiations, etc. The political climate in the US and the upcoming midterm elections could also turn this market sizzle into a fizzle.
I hate to root for bad economic news, but we are a purveyor of mortgages and I want to see rates stay low for our borrowers. Good luck out there, and have a great week.
Hance Thurston
Head of Capital Markets, Southern Trust Mortgage