Rates Reach Four-Year High

There are several big picture factors which are viewed as negative for long-term bond yields, but investors have been aware of them for months. It’s not unreasonable that mortgage rates have climbed to the highest levels in four years. What’s harder to figure out is why the increase took place over the last couple of weeks without any significant fresh news.

First, the supply of bonds issued by the Treasury is increasing due to larger government deficits resulting from policy changes. Yields generally need to rise to entice investors to purchase additional bonds. Second, the new policies potentially will lead to faster economic growth, which could increase future inflationary pressures. Finally, investor expectations for the pace of tightening by the Fed have increased. Investors now assign roughly a 50% likelihood that the Fed will raise the federal funds rate four times in 2018, up from very low levels at the start of the year. In addition, the Fed is reducing its enormous holdings of Treasuries and mortgage-backed securities, which adds to the supply of bonds.

2018-07-30T20:31:08+00:00 April 25th, 2018|Categories: Special Update|