Holy-Moly mortgage rates hit 5.64%, 10-year Treasury yield 3.12%, long-term Treasury bond fund slaughtered

So the Fed is getting ready to pull away from the bond market, and all sorts of things are happening.

By Wolf Richter for WOLF STREET.

The price of the iShares 20+ Year Treasury Bond ETF [TLT], which tracks an index of long-dated Treasury securities, fell another 1.5% on Friday, after falling 2.7% on Thursday. It has plunged 21% since the start of the year and 33.7% from the August 2020 peak. In return for this price drop, investors are getting a return that has risen to 3.0%.

August 2020 marked the peak of the largest bond bubble in US history. It was when the 10-year Treasury yield hit all-time lows as our favorite hype traders predicted it would fall below zero and turn negative. But this bond bubble is bursting. And this is what the “bond massacre” looks like for investors who thought they had invested in a conservative instrument, when in fact they had bought a risky bet on the sustainability of the bond bubble, a long bet – interest rates ultimately negative. And WHOOSH went their money:

Holy Moly Mortgage Rates.

Mortgage rates are rising steadily. The daily measure of the average 30-year fixed mortgage rate by Mortgage News Daily hit 5.64% on Friday, the highest in data dating back to 2009.

Freddy Mac’s weekly measure of the 30-year average weekly fixed mortgage rate, which is a bit of a lag, hit a high of 5.27% since June 2009.

Mortgage payments in Holy-Moly.

House prices have soared and mortgage rates have increased by more than two percentage points and more. What difference does it make in terms of monthly payment?

In 2021, a home purchased at the then national median price of $326,300, with a 10% down payment, and financed at the then average 30-year fixed mortgage rate of 3.09%, would accompanied by a monthly payment of $1,251.

In 2022, a home purchased at the median price of $375,300, with 10% down payment, and financed at 5.27% came with a monthly payment of $1,869.

In other words, the mortgage payment jumped almost 50%, and property tax and insurance expenses also increased. This 50% increase in the cost of property at the current price is going to wipe out demand from large layers of potential buyers.

Most people, when they apply for a mortgage, get a guaranteed rate for a certain period, such as three months. Many current buyers still have rate lock-ins obtained in previous months, and they are not fully feeling the surge in mortgage rates. But people getting their mortgages today are feeling it.

The volume of mortgage-purchase applications has already fallen substantially, as has the volume of home sales. And over the next few months, the new reality of the housing market will become more apparent.

The crackdown on interest rates, including through QE, has caused the biggest real estate bubble of all time. Interest rate hikes, including via QT, will untie it. It’s the Fed’s effort to get the housing bubble under control before it tears the financial system apart again.

The Fed is finally thinking about fighting inflation.

The Fed ended QE, and this week it raised its short-term key rates a second time, this time by 50 basis points. He also confirmed what he had implied in the minutes of the previous meeting, namely that he would reduce the assets on his balance sheet as of June 1 by not replacing maturing securities.

This quantitative tightening or QT has been discussed for months, and there were no surprises in the announcement of QT, and the bond market anticipated it and reacted to this anticipation. Yields have soared, which means long-dated bond prices have fallen – and not just a little, as the iShares 20+ Year Treasury Bond ETF demonstrates.

The 10-year Treasury yield rose 7 basis points on Friday to 3.12%, the second consecutive day to close above 3%. This is now just a hair’s breadth from the peak of the previous tightening cycle, when the yield peaked at 3.24% on November 8, 2018. When the 10-year yield breaks above 3.24%, it will be the highest since 2011 :

The two-year Treasury yield, which had peaked in previous months in anticipation of numerous hikes in short-term key rates, remained in the last trading days roughly in the same range and closed Friday at 2.72%, slightly lower. down from the recent high on Tuesday. of 2.78%, which was the highest since January 2019.

For the two-year return, it was a huge move in just seven months. The magic number is 2.83%, beyond which you have to go back to 2007 to find higher returns.

Future Bond Buyers Benefit from Rising Yields.

Current long-term bondholders must endure the bond slaughter, having been pampered for decades by the biggest bond bull market of all time.

But prospective buyers get a much better deal, being able to buy bonds at lower prices with higher yields. These returns may still not be enough to offset inflation, but very little is offsetting inflation as the bubble of everything has started to deflate, certainly not stocks and cryptos, which have already cratered, and the real estate is shaping up to be the next.

And these prospective buyers still face higher yields after they buy the bonds, which means lower prices for their bonds after they buy them. But hey, it’s the bad breath of the Everything Bubble the next day.

Do you like to read WOLF STREET and want to support it? You use ad blockers – I completely understand why – but you want to support the site? You can donate. I greatly appreciate it. Click on the mug of beer and iced tea to find out how:

Would you like to be notified by e-mail when WOLF STREET publishes a new article? Register here.

Comments are closed.