The stock market has been on a tear lately, with the Dow Jones index flirting with 30,000.
This is amazing because the Dow dropped down to close to 19,000 as recently as March when COVID-concerns peaked.
What makes the sharp rise in stock prices particularly interesting to those of us in the mortgage industry is this: The normal correlation we usually see with stock prices and interest rates has been turned on its head.
As I have been explaining for years in this blog, “good economic news” usually results in higher stock prices and lower bond prices, and therefore higher interest rates.
This is because “good news” usually pushes investors into stocks and out of bonds, which reduces bond prices (because of less demand) and therefore pushes up yields or interest rates overall.
The opposite of course usually happens when “bad economic news” surfaces.
Long story short: rising stock prices usually correlate to higher rates – but not this year.
Here is another fascinating fact that I have alluded to in previous blogs: The 10 Year Treasury closed yesterday with a yield of 0.93% but the 10 Year’s yield was as low as 0.52% in August.
As I mention often, the 10 Year Treasury correlates closely to mortgage rates – but not this year.
Why Mortgage Rates Remain Low
Mortgage rates are very close to where they were in August, despite a surging stock market and increasing 10 Year Treasury Yields – WHY?
The reason mortgage rates remain so low is good ol’ Quantitative Easing – or the enormous purchases of mortgage-backed securities (MBS) by the Fed.
Here is an excellent and very short article by Black Knight that explains all this.
The Fed is buying MBS en masse – creating massive artificial demand which props up prices and keeps rates much lower than where they would otherwise be.
I harp on this repeatedly for a few reasons: (1) it is fascinating, as we have never seen the government (or the Fed) manipulate markets at this scale for this long; and (2) it can’t last forever.
The Fed cannot go on propping up markets and buying mortgage-backed securities forever, as the Fed is effectively just creating money out of thin air and using it to buy MBS.
At some point, the markets will get spooked and the Fed will have to pull back – or something will happen, but nobody knows what.
When that “something” does happen, expect sharply increasing rates, as mortgage rates would be at least 1/2 percent higher now without the Fed’s intervention, and expect enormous turmoil in general.
In other words, those of us in the mortgage and real estate industries should prepare for a lot of rainy days.
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