Tag: interest rates

Market Commentary 7/16/21

Admin
July 16, 2021

Refinances Surge As Bond Yields Drop

Bond rates continue to dip even as inflation readings run hotter than expected. It is true that some inflation appears to be transitory as evidenced by the expected drop in used car prices and the dramatic fall in lumber costs. However, other costs such as wage inflation are stickier and probably here to stay. Finally, housing costs, which have yet to fully appear in inflation readings yet, will begin to affect the report in a bigger way and should keep inflation readings elevated. 

Another factor to consider is that the global central banks have pumped unprecedented amounts of liquidity into the market which has distorted all price discovery, including bond prices.  Also, the U.S. interest rates remain some of the highest in the developed world.  It is ironic that a country such as Greece has lower bond yields than the U.S. while being a much worse credit risk. Should the markets become untethered from the Fed’s belief in inflation being transitory, rates will move up quickly.  The next couple of months will be very interesting and could lead to much more volatile markets.  Potential borrowers who have not taken advantage of these ultra-low interest rates should do so while the window is still open. It is hard to imagine with such strong economic growth that the Fed keeps short-term rates pegged at zero for as long as originally projected. 

As we move into the middle of summer, purchase and refinance applications remain robust. Low-interest rates continue to drive purchase-money business, but there appears to be a pause in-home price increases as we have seen a very healthy increase over the past year that is not sustainable.  Lenders remain eager to lend and non-QM programs are helping borrowers who do not fit inside traditional banks.     

07_09_2021_blog

Market Commentary 7/9/21

damon Damon Germanides
July 9, 2021

Rates Fall Then Rise As Markets Await Key Inflation Data

Bond yields fell mid-week and then recovered Friday. The drop in bond yields appears to be due to technical moves more than concerns about a slowing economy. The more virulent Delta variant of Covid is spreading widely and swiftly, potentially threatening to dampen the global economy.

Some economists are concerned about “stagflation” as a result of falling yields while inflation is rising. For the moment, the economy remains strong and those fears are not justified. Yet with central banks pumping trillions of dollars into the financial system, true price discovery and market independence have been lost. Therefore, we should be cautious about the unknowns of these never-before-seen policies. With equities and housing at record levels, volatility could pick up in the back half of the year. Next week, all eyes will be on key inflation data. Should the print be hotter than expected, the Fed will be under pressure to do more sooner. This could have a big impact on all markets.  

Mortgage volume in the jumbo sector remains robust. Borrowers are eager to close on either refinances or new purchases, as evidenced by the high volume of SBA loans, commercial building purchases, and high-end residential purchases. Low interest rates locked-in long-term are helping buyers justify the high cost of homeownership. 

06_25_2021_blog

Market Commentary 6/25/21

damon Damon Germanides
June 25, 2021

Core Inflation Readings Push Yields Up
Core inflation came in hot, but not hotter than expected. Bonds reacted by pushing yields above up. However, within the report, spending slowed a bit in May and incomes flattened. A slowing in spending is good for the Fed. It will also allow them to continue to print money and prevent them from lifting rates quickly. However, assuming that pandemic-related illness rates in the U.S. continue to decline, the Fed will need to pull back on some of the extraordinary policies that were enacted to combat Covid’s impact on the economy.

Equities have responded well to the Fed’s messaging. A new infrastructure plan will create another boost to the economy and will create good new job opportunities.  

Rising housing prices are beginning to create issues for borrowers, especially in the lower-income tiers, as the combination of rising prices and higher interest rates affect home affordability. If rates do move higher, housing prices will need to adjust.  

Interest rates remain low but could move up sooner than expected if inflation is deemed more structural and less transitory by investors and economists. We continue to advise clients to take advantage of these ultra-accommodative interest rates and to lock in long-term financing as a hedge against inflation. 

06_18_2021_blog

Market Commentary 6/18/21

damon Damon Germanides
June 18, 2021

Fed Talks Of Tapering Drives Rates Lower – Go Figure

The Fed’s shift in policy acknowledged inflation is running hotter than expected. They also confirmed that the tapering of the Covid emergency policy responses was met with big inter-week swings in interest rates and increased volatility in equities. We will see if this change in Fed policy will create the so-called “Taper Tantrum” that we witnessed the last time the Fed tried to unwind its ultra-easy fiscal policies. However, with the 10-year Treasury around 1.500%, interest rates are still very attractive. This ultra-low interest rate environment has encouraged prospective buyers of all assets (stocks, real estate, crypto) to take on more risk either by buying real estate at elevated prices, purchasing stocks over bonds, or hedging dollar depreciation by buying alternative assets.   

A lack of housing supply continues to nudge prices higher. However, affordability is becoming a big problem. If interest rates move up, there will need to be an adjustment in the supply and demand equation, and home prices will be under pressure. We are starting to see appraisals unable to come in at value on certain purchases. With the pandemic waning, perhaps buyers will not be so eager to stay in escrow, especially if the home does not appraise.  

Non-QM or alternative lending is really picking up steam. Lenders are pushing products out to the non-traditional borrower in a manner I have not seen in many years. Thankfully, lenders are keeping the loan to values reasonable so borrowers still have real skin in the game. Loans to foreign nationals, no income verification loans, and asset-based loans are all back with a vengeance. Insignia is placing loans with many lenders and are closing transaction up to $15 MM with very low-interest rates and interest only. The search for yield is driving the products and it will be interesting to see what happens if interest rates rise.

05_07_2021_blog

Market Commentary 5/7/21

damon Damon Germanides
May 7, 2021

Interest Rates Tick Higher As April Jobs Report Disappoints

A surprisingly horrible April jobs report sent bond yields down and lifted stocks higher in early morning trading. This report caught many of us off-guard given that the economy is on fire and many businesses are starting to see a return to normal. It is unclear if this was just a one-off poor jobs report, especially given the strong numbers out of payroll giant ADP regarding the jobs recovery earlier in the week. However, some experts, including folks in the Commerce Department, are asking the powers that be to re-think the extended Covid unemployment benefits. This comes on the heels of many customer-facing businesses complaining that they are finding it hard to entice new workers, even after raising wages and offering other incentives.  

Asset inflation has been seen for quite some time, as has commodity inflation. There is no doubt that goods and services are becoming more expensive, regardless of what official data states. Consumers don’t need to look past the cost of food, gas, or housing to see that for themselves. Business owners can plainly see inflation in their cost of operations. Many businesses with competitive advantages are raising prices. CEOs of major enterprises are seeing inflation pressures that have not been felt in many years. The big question is: when does inflation become a big enough problem to cause the Fed to react. For the moment, the bunk April’s jobs report has given the Fed cover to remain ultra-dovish for longer, especially as the unemployment rate rose to 6.1%.

As the market digests this counterintuitive jobs report, real estate borrowers may have another window to look to lock in extremely accommodative long-term interest rates. Insignia Mortgage has been advocating for months to take advantage of the Fed’s desire to keep interest rates low for longer before the window closes. The pandemic will end eventually and with incredibly robust economic growth at some point, the Fed will need to taper its bond-buying and artificially suppressed normal level of interest rates. However, it looks as if this jobs report will prop open the window a bit longer.

04_17_2020_blog

Market Commentary 4/17/20

damon Damon Germanides
April 17, 2020

The details of reopening our economy are still in flux. State governors are taking the lead and will coordinate their efforts for optimal results in that arena. Equity markets responded positively on Friday to some positive news from our biotech sector on cutting-edge coronavirus treatments. While we are a long way from a normally functioning economy, any and all positive news on how we can start to get back to work is welcomed. Expect April economic data to be horrific. The hope remains in a May re-opening of the economy safely and gradually. Look for a tick up in auto sales both new and used as a signal that we are returning to normalcy.

A national shutdown is a black swan event that is rarely accounted for in investment or lending assumptions. The pandemic has caused great suffering with unemployment expected to hit somewhere between 15% and 30% near-term, with a recovery thereafter. It is no easy task for lenders to navigate an environment where income is on hold, liquid reserves have been hit hard, and appraised values are expected to be lower, not higher in the foreseeable future. This is why lending rates are priced higher than what borrowers are expecting, which seems contradictory in this environment. The link between U.S. government and mortgage spreads has untethered as portfolio lenders (the only lenders in the jumbo mortgage space) demand a higher premium for elevated risk levels.

Portfolio banks are where deals can be done quickly and with certainty and this is where Insignia Mortgage shines. Our lending relationships for residential transactions are fully functional and while guidelines have been pulled back, you can expect reasonable purchase and refinance applications to close. Interest-only loans are still available as are cash-out up to 60% to 70% loan-to-value deals. We anticipate interest rates to gradually move lower as economic activity is ramped up along with the assumption that the virus curve declines as the economy opens.

9/13/19 blog featured image

Market Commentary 9/13/19

damon Damon Germanides
September 13, 2019

Equities have been on a tear this week and bond yields ripped higher as recession fears take a back seat to positive commentary out of the U.S. and China on trade talks. Further calming fears about the state of the U.S. economy was better than expected August retail sales report and the steepening yield curve. With the U.S. consumer comprising a majority of the economy, this report reinforces that there is no imminent recession in sight. Just last week the 10-year Treasury note was trading around 1.500% versus the current rate of 1.87%, a remarkable move in just a few days. With rates on the rise, the recent flood of applications by U.S. individual and corporate borrowers will subside, especially if rates move a bit higher from here. However, as we have opined previously, our feeling was that the U.S. economy is in pretty good shape and that a 10-year treasury under 1.500% was an alert to lock-in rates.

Across the pond, the ECB eased their monetary policy in response to their stalling economy and doubled down on negative interest rate policies. It is becoming unclear how much negative rates help economic viability, but with rates already so low and Europe teetering on recession, the ECB believes it is best to err on the side of more easing. These policies are creating havoc with respect to how to evaluate risk and are pushing investors into riskier asset classes in search of yield. The one positive for the U.S. borrower is negative rates abroad will limit how high interest rates will move back home.

The next big news event is the Federal Open Market Committee meeting next week. Odds heavily favor a rate decrease of one-quarter of one percent on the Fed Funds rate to keep pace with the easing going on in the rest of the developed world. It will be interesting to hear the commentary from the Fed Chair after the rate decision is made and how the markets respond to more easing. 

Aug-02-blog 2019

Market Commentary 8/2/19

damon Damon Germanides
August 2, 2019

Bond yields touched the lowest level since 2016 in a jam-packed information-filled week which included reporting on inflation and the monthly jobs report, the Fed Open Market Committee meeting, and renewed threats of increased tariffs on China.

The core PCE reading for June, the Fed’s favorite inflation reading, came in a tick lower than expected. Inflation remains a major conundrum for global central bankers. Even with ongoing massive stimulus programs in place, inflation readings in developed countries remain below targets. This is one of the big concerns for the Fed and is one of the main reasons that the Fed is comfortable lowering short term lending rates.

As expected, the Fed reduced short term lending rates on Wednesday by one-quarter of one percent. Equity markets fell during Chairman Powell’s press conference when he suggested that further Fed easing might not be necessary although not altogether ruled out either. Equity markets have become addicted to accommodative policies and stock pickers were looking for confirmation of ongoing rate reductions.

Trade discussions with China took a turn for the worse on Thursday, which is a big challenge facing the economy. It is hard to handicap how the trade dispute will influence monetary policy and what influence these talks will have on businesses. However, one should pay close attention to bond yields which dropped soon after the White House announcement. With some sectors of the economy slowing, the fear is the added costs of tariffs at both the business and consumer level could push the U.S. into recession sometime in 2020. 

Friday saw a good June Jobs report with 164,000 new jobs created in the private sector. Unemployment remains near historic lows at 3.7%. This report supports the narrative of a strong domestic economy. However, the positive news on job creation was overshadowed by the trade tariffs threats made the previous day.

Rates are now so low absent a full-blown recession which does not appear to be likely near term, it is hard to argue against locking in interest rates.  With many mortgage products at ultra-low levels, this has spurred both refinance and purchase activity. The monthly savings should be good for consumer spending and may keep real estate prices from falling further.

June 14 2019 blog image

Market Commentary 6/14/19

damon Damon Germanides
June 14, 2019

The rally in bond yields has increased mortgage applications dramatically and has also served as a boon for home buyers making the cost to owning a home more affordable. 

The recent rate drop caught many off-guard as most economists did not forecast 10-year Treasury yields to trade at current levels given the strength of the U.S. economy. The drop in rates can be attributed to ongoing trade tensions with China, fear of a global economic slowdown, a potential recession, poor economic readings in Europe, Brexit uncertainty, and negative bond yields in Europe and Japan. However, a recent attack by Iran on an oil tanker in the Gulf of Oman did little to move rates lower indicating we may be nearing the trough in rates.

While the flattening of the yield curve with some parts of the curve inverting suggest that Fed policy may be too tight and a rate cut is warranted, remember those assumptions have already been priced into current rates. However, with rates now back near historical lows, borrowers should take this into consideration as some prominent investment banks such as Goldman Sachs do not necessarily believe the Fed will cut rates in the near term. In fact, by just speaking about lower rates, the Fed has moved interest rates lower. A wait-and-see attitude may be the policy the Fed takes, especially with inflation in check, tight labor supply, and the recent move higher in U.S. equities.

U.S. consumer confidence remains high and retail sales are strong, illustrating the strength and resilience of the U.S. consumer. With confidence high, but some other business indicators flashing warning signs of recession, there are many cross-currents to think about. With that thought in mind, we continue to be biased toward locking-in interest rates at these attractive levels. For perspective, sub- 4% 30-year mortgages were once thought inconceivable.   

June-7-blog

Market Commentary 6/7/19

damon Damon Germanides
June 7, 2019

Treasury yields dropped this week to a 21-month low. Multiple Fed officials spoke of the possibility of lowering short-term interest rates as ongoing trade tensions with China begin to wear on the U.S. economy. Further causes of concern include slowing manufacturing data both in the U.S. and abroad, negative interest rates in Europe and Japan, and the European Central Bank opining on the high probability of rate cuts in the Eurozone to combat its sluggish economy.

At the moment, there are several conflicting economic signals: consumer and business confidence is strong, but other key economic data are showing signs of a potential recession on the horizon. Of greatest concern is the 3-month to 10-year Treasury curve, which has inverted. A prolonged inversion supports the notion that the markets believe rates are too high, and more importantly, it is a key recession indicator. 

Further pushing bond yields lower Friday was the release of the May Jobs report which came in much cooler than expected (75,000 actual versus 185,000 estimated). Some of the weakness in hires last month could be blamed on worker shortages in certain sectors such as construction. It will be interesting to see how the June jobs report plays out. A tepid June jobs report will all but guarantee a Fed rate cut.  Due to the Fed Funds Rate already at a very low level relative to the length of the economic recovery which dates back almost 10 years now, the Fed has very little room to lower short-term rates and it will act sooner than later once it believes economic growth is stalling. 

Speaking of rate cuts, corporate and individuals are enjoying lower borrowing costs and lenders are aggressively pricing home and commercial loans in the search for new business. With so many experts expecting lower rates to come, we continue to advise clients to be cautious as any unexpected good news (think trade deal with China) could catch markets off guard.  For the moment, we are biased toward floating rates at these levels with the understanding the market is severely overbought.