The bond market correction is overdue
Two key mortgage rates moved in different directions on Monday. The average 30-year mortgage rate was lower, at 3.99%, which equates to a $476.84 monthly payment per $100,000 borrowed, or $28.91 lower than the equivalent payment would have been a month ago.
The average 15-year mortgage rate, on the other hand, was higher, at 3.18%, which equates to a $699.27 monthly payment per $100,000 borrowed, or $21.12 higher than the equivalent payment would have been a month ago.
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Mortgage rates and bond rates: An overdue correction?
If you're in the market for a home mortgage, you may have seen the spike in mortgage rates in the wake of Donald J. Trump's election victory (see graph below). For an explanation of this phenomenon, we look to bond-market strategists, who have coined a new concept -- Trumpflation. This is the expectation that a Trump administration will fuel higher economic growth and higher inflation -- and thus higher interest rates -- through a combination of tax cuts and increased deficit spending (i.e., a shift in fiscal policy). That view has lifted interest rates, whether it be the rate at which the government borrows, or the rate that homebuyers will pay on a new mortgage.
The following graph, which shows the evolution of the rate on a conventional 30-year mortgage (green line) and the 10-year Treasury bond yield (blue line) in 2016, illustrates the gap up that has occurred since the election on Nov. 8 and the extent to which the two rates are correlated.
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Perhaps Mr. Trump's victory is not wholly responsible for this move -- perhaps it's just a convenient catalyst. Speaking on CNBC today, New York Federal bank president William Dudley remarked:
I guess I've always been a little bit more concerned about where the bond market was when bond yields, even a few weeks ago, were extraordinarily low relative to the likely path of monetary policy in the years ahead, so I think the correction in the bond market [was] probably a little bit more overdue.
[Note: Bond prices move inversely with rates, so higher rates imply lower bond prices, thus the use of "correction."]
In other words, the bond market had been ignoring the Fed's forecasts regarding future monetary policy -- with good reason, it must be said, as policymakers have been consistently too bullish during the post-crisis period.
Looking to 2017
In the wake of this correction, which some say heralds the end of the 30-plus year bull market in bonds, the forecasts among bond market strategists for 2017 have widened considerably. What will rates do next year? On that front, the most honest comment one can make is the one president Dudley made on expectations for fiscal policy over the next several years: "[A]t this juncture, it is premature to reach firm conclusions about what will likely occur." (From his speech today in New York City.)
This all may be difficult for potential homebuyers to swallow, but there's only one way to achieve certainty regarding the mortgage rate you'll be paying -- and that's by signing a mortgage contract.
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