Market Commentary 2/19/21

Mortgage Rates Rise as Covid Cases Drop; U.S. Economy Moves Toward Reopening 

Rates are edging higher as the reflation trade continues to play out. Washington is pushing hard for another stimulus package to the tune of $1.9 trillion, putting pressure on the bond market even as equities stall. Covid cases are dropping fast around the country. We hope this will lead to the beginning of a return to normalcy as vaccinations and herd immunity take hold. If the recovery continues apace, the combination of pent-up demand and consumer confidence could yield very strong economic activity. This is partly why longer-dated interest rates are rising as the markets become more optimistic about a global recovery. 

Speaking of inflation, lumber prices have been on a tear which is causing some home builders to pause or slow down building activities. When the cost of lumber and other related commodities rises, it digs into builders’ profits. It also makes new homes more expensive. This in turn puts the brake on housing, which has been a huge part of our economy in the last year. If long-dated interest rates run higher, we fully expect the Fed to step in and control the yield curve with bond purchases.  

Keep a close eye on the upward slowing yield curve. The 10-year Treasury has quietly moved up to over 1.300%, dampening mortgage refinances. As mentioned previously, the odds of rates going higher seem greater than going lower, so now is the time to apply for a loan and take advantage of this extremely accommodative mortgage rate environment while it lasts.