March 19, 2018
Orion’s AEs have noticed that rates are a significant discussion topic among our brokers. There are many moving parts as to why yields are rising and consequently interest rates. Let’s look at some factors that are currently influencing this trend.
The increase in rates has occurred on concerns about rising inflation pressure, with the latest increase coming after a stronger-than-forecast gain in consumer prices. Inflation is picking up as economies around the world are doing well.
Orion’s brokers who follow the market know that the Fed plans to raise the Fed Fund rates this week and at least two more times this year. Fed funds are short-term rates, and only impact equity lines or mortgages that are tied to the Prime Rate. However, with short term rates rising, the yield curve is also affected.
To help understand what the yield curve is, think about buying a Certificate of Deposit (CD). You expect that you are going to get a higher yield the longer you tie up your money, which is usually true. With a flattening yield curve, investing in a 2-year CD is almost paying as much as a 10-year CD. Why bother investing in the 10-year CD? You would buy the 10-year CD if you thought interest rates were going down and you wanted to lock in the rate for a longer period (recession).
Supply and demand affect prices. With the government slowing down its purchases of Mortgage Backed Securities (less demand, prices drop, rates increase) the price of the MBS goes down and we get higher rates. For perspective consider the following, the yield for a 10-year Treasury is almost 3% and rates for a fixed conforming loan with zero points are in the high 4’s. Dial the way back machine to September 1981, the 10 Year Treasury yield was 15.84%, interest rates ranged from 17.79% to 18.22%... Ouch!
No one expects rates to move that high, but Orion’s brokers hoping for lower rates to help their business will probably be disappointed.