Mortgage Rates

Thursday, June 20, 2013 - Article by: DoubleA - Cash Cow Funding -

<div style="text-align: justify;">Rates moved lower and higher in fits and starts from the onset of the financial crisis in 2008. Until then, 3% had been the lowest 10yr yield seen since the 1950's. The apex of the panic in 2008 crushed 3% and took 10yr yields to 2.06%. As the world began emerging from shell-shock into 2009, rates surged higher, though mortgage markets stayed more even-keeled. Even then, they rose appreciably as the panic subsided (and inflation fears emerged).It wasn't long before the skeptics who'd argued that the global economy was due more pain were proven right. Europe entered the fray in 2010 and rates once again fell to generational lows (Treasuries only made it back to 2.34 that time, but mortgages were lower, as they were increasingly closing the horribly wide gap that existed between themselves and Treasuries heading into the crisis).Once again, global markets perceived the turn of a corner into late 2010 and rates again shunned anything under the 3% long term floor (which, of course, was already broken in 2008 and 2009). In fact, in the process of that "shunning," 3% now looked like a line in the sand--the crossing of which indicated further follow-through higher in yield. 3.0% (and the mortgage rates in the upper 4% range associated with it) now looked like a line in the sand, with moves below only reserved for panic. With Europe maybe not imploding and the domestic economy creating jobs for the first time since the crisis hit, panic was on hold.It returned in mid-2011 but this time the domestic economy wasn't in nearly as bad shape. THIS was an important paradigm shift because it set the precedent for the tepid economic recovery being associated with low rates. The rates were like a gift from an anonymous benefactor to anyone who didn't follow financial markets closely. In fact, the benefactor was far from anonymous, and there were actually two: Eurozone panic (part deux) and the Fed's exceptionally aggressive acceleration of monetary policy rhetoric (introduction of a calendar date to the FOMC statement).These factors combined with the realization that hitting the debt ceiling and credit downgrade of the US were merely of political consequences ushered in a new golden era of low rates. Europe would go on to be seen as a threat to global macroeconomic stability even into 2013, but especially in 2011 and 2012.Central bank liquidity was seen as un unending well of support for low interest rates, and 10yr Treasury yields ultimately sank below 1.5% in mid-2012.EVER SINCE THEN, rates have trended higher in general! The US presidential election and uncertainty over the Fiscal Cliff gave the appearance that the trend higher would be contained, but soon into 2013, those were forgotten memories. European headlines now had varying effects--at times acting their former part, but at others, seemingly having less of an effect than they used to. Things were actually changing, and Chairman Bernanke's press conference on March 20th is proof positive of that fact.In that press conference, Bernanke actually spoke about adjusting the pace of asset purchases--the same concept today credited with mortgage rate destruction. At that time, his words were surprisingly familiar to the words that suddenly seemed surprising in late May (although it may be overly technical for the average mortgage rate watcher, I went into excruciating detail on that March 20th press conference HERE).Unfortunately for our collective low-rate paradigm, Cyprus was keeping rates in check and markets weren't ready to take Bernanke at his word, at least not unless the impending Employment Situation Report confirmed the economy could deliver the sustained improvements he was seeking. Even more unfortunate was the fact that the Jobs report not only failed to confirm, but it was absolutely awful. Suddenly, March 20th was forgotten, and markets went about their low rate business with mortgage rates falling almost all the way to 2012's all-time lows.At that point, the worst thing that could have happened for interest rates would have been for the following Jobs report to "revise" the awful one into better shape. It would also be bad if the new report itself was in line with the higher revision. If that happened, it would suddenly paint a very clear, very stable picture--not of boomy economic prosperity, but of a certain stability that might be sufficient to reignite the notion of the Fed reducing asset purchases.On May 3rd, that "worst case scenario" Jobs report was printed ("worst case" for rates, as it was actually much stronger than expected for the economy, and revised the previous two releases into much improved territory). Exactly one week later, the aforementioned notion was clearly reignited as the Wall Street Journal printed a story on the Fed "Mapping an Exit From Stimulus." Markets freaked, and rightfully so. Bernanke had, of course, already mapped much of the exit back in March 20th, though no one was listening.Markets were ready to listen now. It was hard to accept at first. Markets obviously digested the reality in phases, but the question was legitimately asked: wait... if a, b, and c are happening, and x, y, and z are no longer happening, then that means....(dramatic pause) oh no...We may have actually seen a long term interest rate low in 2012." Forgive the adaptation, but the ensuing volatility is wholly evident on the pages of this daily commentary. The two links near the top of today's commentary are poster children for that cause.Today then is an eery culmination of sorts. The Fed had a chance to push back more forcefully on the notion that asset purchases would soon be curtailed, and instead they almost perfectly confirmed that which had already been said (if you see harsh treatment of the Fed's double-talk in the media, please understand that markets are coping with anger and confusion. The Fed's been quite clear and market participants feel duped because the signs were easy to miss).Add to that the fact that Fed policy now has TWO dissenters on today's vote, not to mention that Bernanke himself reiterated previous "taper talk" (taking it to the next level, actually by envisioning a full exit by mid 2014), and interest rates freaked right the heck out.</div>

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