US 30Y Mortgage Rate Climbs To 5.54% While 5/1 ARM Rate At 4.20% (134 Basis Point Spread)

Mike Lea and I wrote a paper entitled “Do We Need The 30yr FRM (Fixed-rate Mortgage)”. We argue that millions of Americans would benefit from an adjustable-rate mortgage like the 5/1 ARM for a host of reasons.

One good reason for a 5/1 ARM is the fact that it 134 basis points less expensive than the 30yr fixed-rate mortgage.

Mortgage rates have risen dramatically with the expectation of Fed rate tightening (green line).

Yes, there is a “fear factor” built in the 30r FRM (“OMG! The mortgage market will collapse without the 30yr FRM!!!!) Hogwash. Or malarkey, as Joe Biden likes to say. The mortgage market actually see the US join the rest of the world in having adjustable-rate mortgage being the predominant mortgage product.

US ARM share peaked at 10.8% in June 2022 before retreating to 7.4% as the 30yr mortgage rate retreated.

The 5/1 ARM product can help the affordable housing crisis in the US if we just let markets work. But in Washington DC, the term “free markets” is like the old Dobie Gillis character Maynard G. Krebs and the word “Work.”

US Producer Price Index Cools To 9.8% YoY In July As M2 Money Growth Cools And Recession Probability Increases

Somehow I doubt if Biden, Harris and Jean-Pierre (Biden’s Press Secretary) will go on the talk show circuit talking about the Producer Price Index Final Demand at 9.8% YoY, meaning that inflation is still raging.

But the curious thing about the PPI Final Demand numbers. While lower than June’s reading of 11.3% YoY, it also coincides with declining gasoline prices and declining growth in M2 Money stock. Which is still growing at 5.9% YoY. The probability of recession is rising (even though technically the US is in recession after 2 consecutive quarters of negative GDP growth.

Here is the more striking chart.

So is the US “improving” on prices because of brilliant Biden strategies (I just laughed at my own “bon mot”)? Or are prices (PPI, gasoline) slowing because of declining demand as the US slips into recession?

Lawrence Summers was once again in the news saying that the way to cool inflation is to raises taxes (and cool demand). Only a true Statist would say something like that. Larry, how about Biden and Congress stop spending so much money that is helping to fuel inflation?

One Washington DC types would rest their hopes on cooling inflation by having the US slip into recession AND raises taxes.

Biden looking for a way out.

Jurassic MBS Market! Agency MBS Prices Swoon With Implied Fed Hikes (Duration Risk Increases Too)

Agency mortgage-backed securities (MBS) prices started to degrade as The Federal Reserve started to try to combat inflation caused by Biden’s energy policies and rampant Federal spending. That is, under June when the implied Fed O/N rate (red line) cooled and the 30-year mortgage rate (blue line) has come down a little.

In terms of duration risk, the FNCL 3% MBS duration has risen with anticipated Fed tightening.

So, further Fed tightening will result in greater MBS losses AND rising duration risk.

Hold on to your butts!

Fannie Mae’s Home Purchase Sentiment Index Falls From 81.7 In March 2021 To 62.8 In July 2022 (As Fed Tightens And Home Prices Boom)

Fannie Mae’s Home Purchase Sentiment index has declined from 81.7 shortly after Biden was sworn-in as President to a meager 62.8 in July 2022.

Of course, mortgage rates have risen quite rapidly and home price growth remains elevated as The Fed still has not trimmed its balance sheet as promised.

Goin’ Down! US Treasury 2-year Yield Drops 15 Basis Points In AM (10Y-2Y Treasury Yield Curve Remains Inverted At -38.870 BPS)

Goin’ down!

Lots of volatility in markets culminating in a 15 basis point drop in the US Treasury Note yield.

Since the 10-year Treasury yield dropped only -2.7 basis points, the 10Y-2Y yield curve rose slightly to -38.87 basis points.

Labor Blues! US Labor Productivity Declines -4.6% In Q2 As Unit Labor Costs Sizzles At 10.8% (Fed Balance Sheet Still Out In Force)

Labor Blues!

US labor productivity declined in Q2, down -4.6% since Q1. At the same time, unit labor costs continue to soar at a rate of 10.8%.

You can see that The Federal Reserve has begun to SLOWLY reduce it balance sheet.

Somehow, I don’t think Biden’s team will be discussing today’s news, other than report that “It’s A Beautiful Day Today.”

Simply Unaffordable! Gap Between Real Home Price Growth (+11.17% YoY) And Real Wage Growth (-2.15% YoY) Near Highest Since 1988 (REAL 30Y Mortgage Rate Is Now -3.23%)

The US housing market is simply unaffordable for millions of Americans. To illustrate the problem, here is a chart of the Case-Shiller National home price index less CPI YoY graphed against Average Hourly Wages less CPI YoY.

The gap between the REAL national home price index YoY and REAL US average hourly earnings YoY is near the largest since 1988. Inflation is making matters far worse since REAL average hourly earnings growth continues to decline.

The only thing positive to say is that REAL home price growth YoY is lower now than at the peak of the 2005 home price bubble that burst catastrophically.

Another “positive” is that the REAL 30-year mortgage rate has fallen to -3.23%. At the peak of the house price bubble in June 2005, the REAL 30-year mortgage rate was +2.58%. THAT is one big difference between the pre-2008 recession and today’s impending recession.

Weekend Update! US Treasury Yield Curve Inversion Worsens Screaming Impending Recession, 30Y Mortgage Rate Rises To 5.6% (5/1 ARM Rate Rises To 4.21%)

Here is your weekend update on Treasury and Mortgage markets.

The current US Treasury 10Y-2Y yield curve just slipped further into reversion at -40.299 basis points, screaming impending recession. Oddly, The Federal Reserve has been leaving its balance sheet of Agency Mortgage-backed Securities (MBS) in tact (green line).

On the mortgage front, Bankrate’s 30-year mortgage rate index rose to 5.60% while the affordability-friendly 5/1 Adjustable Rate Mortgage (ARM) rate rose to 4.21%.

Currently, a 5/1 ARM borrower can save 139 basis points over the traditional 30-year mortgage rate.

Have a wonderful weekend!

US 10-year Treasury Yield Surges +14 Basis Points As Strange Jobs Report Spurs Fed Rate Hike Fears

Today’s jobs report was … strange. While the US economy added more jobs than expected, we also saw labor force participation contract and real wage growth decline again.

The reaction in the bond market? US Treasury 10-year yields exploded by +14 basis points. As I used to tell my fixed-income students, any basis point jump or decline of 10 basis points or more is a BIG DEAL.

The implied target rate for The Fed (based on Fed Funds Futures) is now lower for the Jan 1, 2024 FOMC meeting (3.025%) than it is for the Sept 21, 2022 FOMC meeting (3.034%).

Mortgage rates? They will go up as The Fed removes its Brawndo, the economy mutilator.

US 30Y Mortgage Rates On Rise Again, Bankrate 30Y Rate UP 92% Under Biden/Powell (US Yield Curve Inversion Worsens, Worst Inversion Since 2000)

After mortgage rates topped 6%, they settled back down with the global economic slowdown, but are on the rise again.

Bankrate’s 30-year mortgage rate index rose to 5.57% after rising above 6% in June 2022. Mortgage rates are up 92% under the team of Biden and Fed Chair Powell as The Fed tries to extinguish the inflation fire cause by 1) excessive Fed stimulus, 2) Biden’s anti-fossil fuel policies and 3) Biden/Congress’ reckless spending.

The Fed still has not shrunk its balance sheet yet and home price growth is still soaring.

The US Treasury 10Y-2Y yield curve inversion just worsened to -38.503, the most inverted since 2000.

Over the longer-term, the US Treasury 10Y-2Y yield curve is the most inverted since 2000. Remember, the 10Y-2Y yield curve inverts prior to a recession.

In terms of putting out the inflation fire, The Fed is acting more like The Three Stooges.