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What is Driving Rates Up?

Rates, stocks, property values, and so on, don’t increase or decrease in value at a steady pace year after year. In the past year 30-year fixed rates mortgages have gone up just over 1%. Orion’s brokers clients want to know why. And if rates coming back down.

The fundamental answer is that mortgage rates move in harmony with the yield on the 10-year Treasury note. Mortgage rates have gone up because the yield on the 10-year Treasury note has gone up. At the end of September 2016, the 10-year yield was 1.63%. At the end of October 2017, it was 2.36%. Presently it is 3.20%. Consequently, the answer is "mortgage rates have gone up because the 10-year yield has gone up."

The next question is, "Why has the 10-year Treasury yield gone up 1.5% in the last 2 years?"  Yields have gone up because prices have gone down. Prices go down when there are more sellers than buyers. Consequently, the real question is, "Why are there more folks selling Treasury debt than buying Treasury debt?"

The reason is that the U.S. economy is doing well, as are many other economies around the world. But some nations, such as China, are having their own fiscal problems and are selling Treasuries because they need cash. That pushes rates higher. And people feel that inflation will increase, and the higher inflation will reduce the value of Treasury debt. The extremely low unemployment rate has created concern that wage inflation is inevitable and wage inflation, unlike inflation in the price of goods, persists.

Increasing Federal budget deficits force issuance of more Treasury paper and we also have the constant need to refinance the $21.6 trillion in already existing national debt. Unless demand for Treasury debt keeps pace with increased supply, prices will fall, and Treasury yields will rise. And don’t forget that the FOMC (Federal Open Market Committee) hiking the Fed Funds target rate to 2.00% - 2.25% affected the entire yield curve.

It is likely the case that it is concern about inflation that is driving selling. Last week we had a strong Producer Price Index number. This week we’ll see what consumer prices did in October. Participants do not believe that we can continue extremely low unemployment, healthy GDP growth, tariffs and not see an increase in inflation.


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