Interest rates shot way up yesterday – catching most of the industry by surprise (again).
This is because rates have held amazingly steady for the last several months – but now rates are back up to levels we have not seen since early July.
WHY DID RATES GO UP?
The primary reason is a “Taper Tantrum” or the market reacting to the Fed’s announcement that it will soon start to taper its bond purchases.
Remember that the Fed is purchasing $120 billion per month in mortgage-backed securities and treasuries as part of its “quantitative easing” program – in an effort to keep interest rates artificially suppressed.
The artificial or excess demand for bonds pushes prices higher, which in turn pushes yields and rates lower.
So – the Fed’s announcement that it will soon start to “taper” these purchases sent rates up.
Positive economic news, particularly from overseas economies, also helped push rates up.
WILL RATES FALL AGAIN?
There are many market analysts who think they could, including Jeff Snider, Research Head for Alhambra Investments.
I have referenced Mr. Snider in previous blogs (Is the Fed a Powerless Wizard of Oz?), as he thinks the Fed’s power is greatly limited and that the market only reacts to its announcements temporarily before more powerful market forces take over.
Mr. Snider also thinks inflation concerns may be overstated because our money supply is not increasing in the way that many people think and because the overall world economy is much weaker than most people think.
Dr. Lacy Hunt is also a famous economist who thinks deflation (and lower rates) are still a possibility, as he explains in this interview from July.
On the other side of the coin are ALL of the inflation hawks – and there are so many that I won’t bother naming them all.
They all believe that our current inflation is not transitory; that supply chain constraints (that are pushing up prices) will remain; that the money supply has increased so much that there is no turning back; that increasing wage levels are here to stay and will be reflected in prices; that de-globalization will make us less efficient and push prices up; that actual inflation is already much higher because CPI #s are misleading; that massive government spending will foster more inflation no matter what; and/or that the dollar will get weaker, making imports more expensive.
Here is a recent Forbes article (“6 Reasons Inflation Is Not Transitory”) explaining much of this.
The other factor that could have a major effect on rates is China – something I blogged about recently (Are China’s Woes Good for Rates?)
China’s largest developer (EverGrande) is teetering on bankruptcy and that could have a massive ripple effect that could bring down rates significantly.
TAPERING NOT A BIG DEAL
Jeff Snider is not the only one who thinks “tapering” effects are over-stated.
Barry Habib of MBS Highway fame also thinks it is overstated because the Fed will still be buying massive amounts of bonds with its “repurchasing” efforts – with monies they get from bonds that are paid off.
CAGE MATCH OF THE CENTURY: INFLATION VS DEFLATION
In April I blogged about The Cage Match of the Century – Inflation vs. Deflation because this debate was just starting to heat up and because the outcome will affect interest rates so much.
CONCLUSION: LOCK NOW TO BE SAFE
While rates could come down temporarily, it seems less and less likely given all of the inflation signals and predictions.
And – if inflation does set in, rates will shoot up without a doubt because investors (bond buyers) will not accept yields that are way under the inflation rate.
So – my advice is the same as always – get in now and lock in your rate now, as rates could easily climb much higher.
The 1970s could well be back!
And oh yeah … if rates come down again, we’ll be the first to call with a no-cost refi opportunity. 😊
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