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Treasury Yields & Mortgage Rates Spike: Markets begin to struggle with quantitative easing




This is going fast now.

By Wolf Richter for WOLF STREET.

The two-year government interest rate began to rise at the end of September, from around 0.23%, and ended the year at 0.73%. During the five trading days since then, it jumped to 0.87%, the highest since February 28, 2020. Most of the jump happened on Wednesday and Thursday, triggered by the hawkish Fed minutes on Wednesday.

The markets are finally starting to take the Fed seriously and in small steps. And the most ruthless Fed ever – it still pushes money-over-the-fist and suppresses short-term interest rates to close to 0%, despite the worst inflation in 40 years – is finally and in small steps, after a kind of come-to-Jesus moment late last year, begin to take inflation seriously. Treasury yields now responds:

Treasury Yields & Mortgage Rates Spike: Markets begin to struggle with quantitative easing

Jawboning on quantitative tightening.

Although the Fed has actually done no hawk thing, and still prints money and suppresses interest rates to close to 0%, it lays the groundwork with countless warnings everywhere, from the FOMC press after the December 15 meeting. , when Powell said everything would go faster, to the hawkish speeches of the Fed governors, to the very hawkish minutes of the FOMC meeting, which put Quantitative Tightening in black and white.

The Fed now states that it will make Quantitative Tightening – QT is the opposite of QE – its primary policy tool in the fight against inflation. It even specified in the protocol why QT will not blow up the repo market, as it had done last time in September 2019, because in July last year, the Fed established Standing Repo Facilities (SRF) to calm the repo market while the balance sheet is wound up faster, faster and more than last time.

It is now clear to everyone that the Fed will raise interest rates faster and more than expected just a few months ago, and that it will reduce the balance sheet faster, faster and much more.

This is a big thing. And the Fed communicates this shift to the markets so that the markets can adapt to it gradually, more or less neatly, and not all at once. And so does the financial market.

10-year government return highest in almost two years.

The 10-year government interest rate has risen by 25 basis points since the end of the year, to 1.78% on Friday. It is now at its highest point since 21 January 2020, before the pandemic was a factor for the markets at all:

The jawbone will continue until morale improves.

Beaten by the worst and most non-temporary inflation in 40 years, even the ultimate Fed pigeons, such as San Francisco Fed President Mary Daly on Friday, are now raising interest rates this year, and more importantly the arrival of quantitative easing right after the abolition. .

“I would prefer to see us gradually adjust the key policy rate and enter into a balance sheet reduction earlier than we did in the last cycle,” she said, reiterating in harmony what the minutes of the FOMC meeting on 15 December revealed in detail on Wednesday.

Powell and the minutes called the balance reduction “runoff.” This quantitative tightening, or QT, is the opposite of QE.

QE was designed to push down long-term interest rates, and it did a fantastic job with it, triggering the biggest wealth bubbles the United States had ever seen, including the massive real estate bubble, with house prices rising 20% ‚Äč‚Äčover a 12-month period. from already very high levels.

QT does the opposite: It allows long-term interest rates to slide higher, and markets will adapt to it, just as they have adjusted to QE.

Markets are reacting to the Fed’s shut up, and long-term interest rates are already rising, even though the Fed has just started talking about QT, while still doing QE, and while still suppressing short-term interest rates. Jawboning is an important and official tool in the Fed’s toolbox.

Mortgage rates are the highest in two years and are rising rapidly.

The increase in the 10-year government interest rate has already translated into the highest mortgage rates in almost two years. And these prices are moving faster and higher.

According to Freddie Mac, the average 30-year fixed-rate mortgage rate rose to 3.22%, the highest since May 2020. But that was based on surveys that most mortgage bankers filled out at the beginning of the week. And since then, mortgage rates have risen.

Daily targets for average mortgage rates have jumped every day. The average 30-year fixed-rate mortgage index of the Mortgage News Daily has jumped to around 3.50% on Thursday and Friday – prices not seen since the end of January 2020 (chart via Mortgage Daily News)

This rate of 3.50% is still very low, but it is much higher than it was in 2020, when the average 30-year fixed interest rate fell to 2.65%. And the Fed continues to suppress long-term interest rates via QE. QT does not even start until a few months from now. So the show has not even stared yet. We look at the preview.

And these forthcoming higher mortgage rates must be used to finance house prices that have exploded with ridiculous amounts over the past 18 months from already ridiculously inflated rates, given the massive QE and interest rate repression for much of the last 13 years.

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