2410 Camino Ramon, Ste 324
San Ramon, CA 94583
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Fax: (925) 244-1148

2410 Camino Ramon, Ste 324
San Ramon, CA 94583
(925) 244-1099 | (800) 323-7975
Fax: (925) 244-1148

Saturday, October 23, 2021
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Market Commentary

Updated on October 22, 2021 10:03:52 AM EDT

There is no relevant economic data being posted today. Fed Chairman Powell will be speaking at 11:00 AM ET, but the topic does not appear to be something that will influence mortgage rates. That said, his words have the potential to be a market mover at any time. We will be watching for any surprises.

It is a good opportunity to address the recent upward move in bond yields (and mortgage rates). The last time the benchmark 10-year Treasury Note yield was this high was back in mid May and before that, early April. It appears there are two primary driving forces behind this sell-off. One is the current decline in COVID cases that had been a drag on the economy. The surge in cases this summer threatened to derail the economic recovery from the pandemic. With cases rapidly declining, odds are now better the economy will be able to fully recover, making bonds less appealing to investors.

More impactful is concern about lasting inflation. Rising prices and supply chain issues were no surprise after the economy rebounded from the shutdown and the restrictions that were in place. But the term transitory inflation was used to describe what was expected to be a temporary issue. However, there are now growing concerns that inflation may be here for a longer period than initially thought. In other words, analysts and traders are growing impatient. Inflation is the number one nemesis of the bond market because it erodes the value of a bond’s future fixed interest payments, causing investors to sell at a discount to offset that loss in value. And when investors sell bonds, yields and mortgage rates usually move higher.

On a similar note, there is plenty of speculation that the inflationary pressures in the economy are going to cause the Fed to start reducing their current monthly bond purchases at the November 2-3 FOMC meeting. At $120 billion a month, the Fed is currently a significant buyer of Treasury securities and mortgage bonds. If they start tapering their monthly purchases, it means there is less demand and more supply available in the market, resulting in discounted prices (and higher yields). With that FOMC meeting nearing quickly, traders are taking defensive positions in case the Fed announces a sizable reduction in their monthly buying. If the Fed decides to delay that move, or announce a minimal adjustment, we should see bonds start to rally November 3rd.

Also worth noting is that both times this year that yields touched current levels, they almost immediately started a downward trend that brought mortgage rates lower. That paints a clear resistance level that not only is likely contributing to this morning’s gains but also allows us to be optimistic that the selling may be nearing an end. Assuming that is accurate, we should see rates remain fairly calm or move a little lower heading into the FOMC meeting.

Next week has a good-sized number of economic releases for the markets to digest, in addition to a couple of Treasury auctions. Most of the week’s data is considered to be of moderate or low importance, but there are two releases that are expected to be more influential than the others. One of them, the initial 3rd quarter GDP reading, is extremely important to the stock and bond markets. The week starts off with nothing of relevance set for Monday. Look for details on all of next week’s activities in Sunday evening’s weekly preview.

 ©Mortgage Commentary 2021

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