On Tuesday, stocks surged, reflecting the pent-up demand that had built during the long weekend. The Dow Jones Industrial Average climbed by 106 points, buoyed by positive reports on housing and consumer confidence.
The following day, however, the market mirrored this volatility, as the Dow fell by 106 points, exemplifying the ease with which gains can vanish.
Yesterday, the Dow gained a modest 26 points, while the Japanese Nikkei 225 plummeted 483 points. Amidst these fluctuations, another highlight emerged: we observed with interest how the yield on the 10-Year Treasury Note spiked to 2.13 percent.
Typically, following Treasury yields might seem as mundane as watching paint dry, but occasionally they deliver notable changes. This could very well be such a moment.
Just a month ago, on May 2, the yield on the 10-Year Treasury was merely 1.63 percent. Since then, yields have soared nearly 30 percent in just this month. Is this the start of a significant shift in the Treasury bond landscape?
It Can’t Last Forever
We have long speculated about the potential collapse of Treasury bonds, an outlook we’ve maintained since the days of George W. Bush’s presidency.
Regardless of whether the bubble is finally bursting, rising yields could dampen the nascent housing recovery or, at the very least, hinder refinancing opportunities for mortgage brokers. According to a recent report from CNBC…
“A sharp rise in mortgage rates over the last few weeks signals it may already be too late for many homeowners to benefit from refinancing.”
“This comes at a time when thousands have begun to see equity in their homes, making them eligible.”
Moreover, increasing mortgage rates could unravel the Federal Reserve’s previous interventions:
“The Fed has invested billions into the mortgage market since the onset of the housing crisis, bringing mortgage rates to historical lows; however, this trend cannot persist indefinitely. Recent comments from Fed Chairman Ben Bernanke suggest that monthly mortgage market support may soon come to an end.”
“This shift has driven the rate on the 30-year fixed conventional mortgage to 3.90 percent, the highest level in a year and perilously close to the psychologically significant 4 percent mark, while home prices rise unexpectedly fast.”
Market Forces and Market Intervention
As mortgage rates increase, the affordability of purchasing a home decreases. Consequently, for the market to stabilize, home prices must adjust downward. Dan Green, a loan officer at Waterstone Mortgage, estimates that “a one percentage point increase in mortgage rates can reduce the average home buyer’s purchase price by 11 percent.”
On Tuesday, the S&P Case-Shiller home price index reported that prices rose by 10.87 percent year-over-year in March. However, with May’s mortgage rates having already climbed by 0.3 percent, a further increase of 0.7 percent would necessitate an 11 percent decrease in home prices to align with the average purchasing ability of buyers.
In simpler terms, should mortgage rates reach approximately 4.6 percent, the 10.87 percent year-over-year increase could be entirely negated. What would that mean for the Federal Reserve’s efforts?
Ultimately, market forces will prevail over market interventions. They expose the absurdities created by the Fed’s attempts to manipulate the landscape to their advantage—such as 10-Year Treasuries boasting yields of 1.4 percent and 30-Year mortgage rates lingering at 3.5 percent.
These are the distortions one encounters in an unnatural environment. They are so exaggerated that all one can do is point, laugh, and marvel at the absurdity. Sadly, once the world has adapted to these discrepancies, another adjustment becomes necessary when they revert to their true state. These adjustments are frequently painful.
Stay tuned!
Sincerely,
MN Gordon
for Economic Prism
Return from Market Forces and Market Intervention to Economic Prism
