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Treasury yields and mortgage rates spike: Markets begin to grapple with quantitative tightening

It is moving fast now.

By Wolf Richter for Wolf Street.

The two-year Treasury yield began to rise from about 0.23% at the end of September, and ended the year at 0.73%. In the five trading days since then, it jumped by 0.87%, the highest since February 28, 2020. Most of the jump happened on Wednesday and Thursday, starting with Fed minutes on Wednesday.

The markets are finally in more baby steps to take the Fed seriously. And the most reckless Fed ever — it’s still printing a handful of money by hand and pushing short-term interest rates to nearly 0% despite the worst inflation in 40 years — is finally and in baby stages, somehow. After the arrival of the -Jesus moment late last year, started taking inflation seriously. Treasury Yield is now responding:

Treasury Yields And Mortgage Rates Spike: Markets Begin To Grapple With Quantitative Tightening

Jawboning About Quantitative Tightening,

Even though the Fed hasn’t really been in a rush, and is still printing money and pushing interest rates down to nearly 0%, it’s laying the groundwork from the FOMC post-meeting presser on December 15 with myriad warnings all over the place. Used to be. , when Powell said everything would move fast, to the scathing speeches from Fed governors, to the very flamboyant minutes of the FOMC meeting, which kept the quantitative tightening in black-and-white.

The Fed is now making it clear that it will make quantitative tightening — the opposite of QT QE — its primary policy tool in fighting inflation. It also explained in minutes why Qt won’t blow up the repo market, as it last did in September 2019, because last July, the Fed set up permanent repo facilities (SRFs) to calm the repo market . The sheet cures quicker, faster and lasts longer than last time.

It is now clear to everyone that the Fed will raise interest rates sooner and more than expected just a few months ago, and it will shrink its balance sheet sooner, faster, and much more.

This is a big deal. And the Fed is communicating this change to markets so that markets can adjust to it gradually, more or less systematically, and not all at once. And the Treasury market is doing just that.

The 10-year Treasury yield is the highest in nearly two years.

The 10-year Treasury yield has risen 25 basis points from year-end to 1.78% on Friday. It is now at the highest point since January 21, 2020, before the pandemic was even a factor for the markets:

Treasury Yields And Mortgage Rates Spike: Markets Begin To Grapple With Quantitative Tightening

The jawbone will continue to break until morale improves.

Troubled by the worst and very temporary inflation in 40 years, even the last Fed doves, such as San Francisco Fed Chair Mary Daly on Friday, are now talking of rate hikes this year, and even more. Importantly, the arrival of quantitative tightening immediately after liftoff .

“I would love to see us gradually adjust the policy rate and move towards a reduction in the balance sheet earlier than in the previous cycle,” she said, echoing in good faith the minutes of the December 15 FOMC meeting on Wednesday. was disclosed in detail.

Powell and Minutes called the reduction in “runoff” the balance sheet. This is the opposite of quantitative tightening, or QT, qi.

QE was designed to push long-term interest rates down, and it did an amazing job at that, and it triggered the biggest asset bubble the US has ever seen, including the massive real estate bubble, In which the house prices increased by 20%. 12 months period, from already very high levels.

QT does the opposite: it allows long-term interest rates to drift higher, and markets will adjust to it as they adjust to QE.

Markets are responding to the Fed’s jaw-dropping response, and long-term rates are already rising, even though the Fed has started talking about QT while it’s still QE, and while It is still pushing short-term interest rates. Jawbone is an essential and official tool in the Fed’s toolbox.

Mortgage rates are the fastest and highest in two years.

The jump in 10-year Treasury yields has already translated into the highest mortgage rates in nearly two years. And those rates are going up more quickly.

According to Freddie Mac, the average 30-year fixed rate mortgage rate rose to 3.22%, the highest since May 2020. But this was based on surveys that most mortgage bankers filled out at the beginning of the week. And since then, mortgage rates have risen.

Daily measures of average mortgage rates have jumped every day. The average 30-year fixed-rate mortgage rate index by Mortgage News Daily jumped nearly 3.50% on Thursday and Friday – rates not seen since late January 2020 (Charts via Mortgage Daily News)

Treasury Yields And Mortgage Rates Spike: Markets Begin To Grapple With Quantitative Tightening

This rate of 3.50% is still very low, but it is much higher than in 2020, when the average 30-year fixed rate fell to 2.65%. And the Fed is still pushing long-term interest rates through QE. Qt won’t even start for a few months. So the show hasn’t even started yet. We are watching the preview.

And these impending high mortgage rates will have to be used to finance home prices, which have already exploded by ridiculous amounts of ridiculous amounts over the past 18 months, for a large part of the past 13 years. Given the massive QE and interest rate suppression for .

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Treasury Yields And Mortgage Rates Spike: Markets Begin To Grapple With Quantitative Tightening

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Treasury Yields And Mortgage Rates Spike: Markets Begin To Grapple With Quantitative Tightening

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Treasury Yields And Mortgage Rates Spike: Markets Begin To Grapple With Quantitative Tightening

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