Just as it appeared there was no relief in sight for mortgage rates, the Treasury Department stepped in.
No, this isn’t QE all over again, and mortgage rates aren’t headed back to the 3s. Wishful thinking.
But it is a way to boost liquidity in the bond market, which should help push mortgage rates a bit lower in the short term.
Again though, that’s the rub. It’s only a bit, not a lot. Probably not enough to sway a home purchase decision or a refinance.
And the 30-year fixed still remains close to its 52-week high of around 6.875%.
Treasury Department Announces Long-End Liquidity Support
Yesterday, the U.S. Department of the Treasury announced that it was increasing liquidity support of longer-dated nominal coupon securities.
This includes the 10-year to 20-year sector and the 20-year to 30-year sector. The 10-year bond correlates best with 30-year fixed mortgage rates because most home loans only actually last a decade.
They are paid off earlier than 30 years due to a home sale, refinance, or prepayment.
As such, the move should result in lower mortgage rates, all else equal.
Specifically, the Treasury said it would increase its support by at least double, with the current maximum size per operation $2 billion rising to at least $4 billion.
The move is intended to improve liquidity for both buyers and sellers of long-dated bonds with the Treasury stepping in as a big buyer. And it is effective immediately.
If it works as intended, sellers will feel more comfortable unloading bonds, knowing there is a major buyer in the government.
And buyers will also feel more at ease knowing there is a big buyer out there if and when they want to sell.
It’s all designed to keep the bond market moving more smoothly, with a recent bond selloff creating a lot of fear and uncertainty.
But It Doesn’t Fix the Underlying Problems That Have Sent Mortgage Rates Higher
While this move is perhaps helpful to stop the bond selloff, it doesn’t really address why bonds are selling off.
It provides short-term relief, but there’s still the issue of large government deficits, increased bond issuance to fund those deficits, weak foreign demand for our bonds, and competition from tech companies issuing their own debt.
At the same time, we’ve got renewed inflation concerns related to the war with Iran, which is costing the government a lot of money while also pushing the price of oil higher.
So while the Treasury move seeks to calm things down, it’s not a fix-all solution to get bond yields lower.
And if we don’t address these aforementioned items, interest rates will continue to remain elevated for the foreseeable future.
Mortgage Rates Remain Nearly 1% Higher Than Pre-War Levels
The key is really figuring out the Middle East conflict, which seems to have been the main driver in pushing bond yields (and mortgage rates) higher.
The 30-year fixed mortgage averaged 5.99% at the end of February and early March, before the conflict began.
It has since risen to around 6.75% and was as high as 6.875% last month, meaning rates jumped nearly a full percentage point.
If we want materially lower mortgage rates, we need to solve the problem in the Middle East.
And then hope inflation continues to cool as it was last year. There’s also the matter of the AI companies issuing debt to fund their massive buildout.
That too can lead to higher yields and interest rates on mortgages. But for me, it’s mostly the Iranian conflict that needs resolving.
If we can make some headway there, we can get 30-year fixed mortgages back toward the lower 6s again.
In the meantime, it’s going to be another slow year for home sales as they tend to drop off when rates are north of 6.5%.
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