Yesterday’s big worry was the 10-year Treasury auction. Would there be any appetite for bonds?
Well, it turned out to be good news because it actually went well. Mortgage rates had initially climbed on the day, but made their way back down in the afternoon.
But the move wasn’t sizable and likely won’t bring much relief to mortgage rates today.
The 10-year yield is still hovering around 5.25%, mostly flat from yesterday’s close, so 30-year fixed mortgage rates should remain around recent highs of 7.60%.
That means the “win” right now is simply not going any higher, though that’s not a guarantee.
The Bond Auction Went Better Than Expected
The Treasury sold $39 billion in 10-year notes yesterday and demand appeared to be solid.
Indirect bidders, which include foreign central banks, took 80% of the sale. That’s well above recent auctions.
And dealers, who get stuck with whatever nobody else wants, were left with just 2.5%. They typically end up with as much as 10%.
In other words, the bond buyers finally showed up once yields got high enough, which is something I’ve been pondering lately.
At a certain point, these yields go high enough and investors think, wait, these aren’t half bad.
The 10-year had hit 5.35% ahead of the sale, the highest rate since 2002, then backed off some once the results came out.
The takeaway is that demand for bonds is finally materializing, but only because the yields are finally beginning to look appetizing at these levels.
The Fed Probably Isn’t Done Hiking
The minutes from the Fed’s September meeting also came out right after the auction yesterday.
That was the meeting where they raised rates a quarter point to a range of 3.75%-4.00%.
A majority of Fed officials said another hike by year-end would likely be appropriate.
And Fed Governor Waller said this morning that more hikes will be needed if the data keeps coming in as expected (hot inflation), though he noted that they don’t have to come back to back.
At the moment, CME FedWatch put the odds of an October hike at just 17%, so back-to-back hikes seem very unlikely.
So chances are the next hike won’t be until December at the earliest, though the expectation of further hikes keeps upward pressure on mortgage rates.
[Compare mortgage rates and monthly payments side by side with my mortgage rate calculator.]
Why Bond Yields Rose This Morning, Then Eased
The 10-year bond yield climbed to about 5.34% overnight, and once again oil was the culprit.
Brent crude jumped more than 4% and is back above $104 due to more attacks in the Gulf and the Strait of Hormuz.
Prices had dipped yesterday after the IEA agreed to release more emergency supplies.
But as noted yesterday, a storm in the Gulf of Mexico has also forced Shell and Chevron to halt some production.
There are also reports that Broadcom is arranging up to $50 billion in financing for OpenAI, which is arguably another reason why bond yields are so high.
All the AI investment is crowding out investment for alternatives like bonds, which keeps pressure on yields.
However, there did seem to be a shift yesterday where bond selling finally faced resistance.
So perhaps mortgage rates might be nearing a top for now.
Just don’t mistake a pullback for a larger move. A positive bond auction took pressure off mortgage rates, but chances are the global bond rout isn’t quite over.
And until the Middle East situation gets resolved, higher oil prices will continue to pressure yields higher.
As stated, a win right now is simply not going any higher.
Read on: How are mortgage rates determined?
(photo: lorenz.markus97)
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