by “Nothing goes to hell in a straight line.” This is how functioning markets adjust to a new reality: Higher inflation, higher Prices.
By Wolf Richter for WOLF STREET.
There was much discussion, hand-wringing and Fed pivot fantasies over the fall in the 10-year Treasury yield from 4.25% at the end of October to 3.51% at Friday’s close. That’s down 74 basis points. In percentage terms, the return fell by 17%. A fall in yield means a rise in the prices of those securities. So this drop in yields represents a price rally.
But here’s the thing: During the summer bear market rally, the 10-year yield fell 25% from 3.49% to 2.60%. Before that there were some minor bear market rallies. But the biggest bear market rally during this bond bear market occurred from April 2021 to August 2021, when the yield fell 30% from 1.70% to 1.19%.
The 10-year yield closed at 0.52% on August 4, 2020, marking the end of the 39-year bond bull market. Since then, the 10-year yield has risen sharply, with large swings, followed by smaller retracements, followed by large swings, followed by smaller retracements, etc., true to the Wolf Street dictum that “nothing goes to hell in a straight line.” . ” The 10-year yield marked higher highs and higher lows as the price rose. And the current bear market rally fits in well, and the yield could continue lower, and it would still fit in well:
Back in August 2020, the 10-year yield hit a low of 0.52% after months of widespread propaganda from bond and hedge fund kings, queens and gurus on social media, CNBC and Bloomberg that the Fed Pressure would push interest rates into negative territory, as central banks in Europe and Japan had done.
This was an attempt to manipulate people into buying a 10-year security with almost no yield, driving yields further down and prices further up to make the kings, queens, and gurus lots of money .
Back then, anyone buying 10-year maturities was getting a really bad deal, because that marked the bottom of the 39-year bond bull market, during which the 10-year yield fell from 15.8% in September 1981 to 0.52% in August 2020 has been – and not in a straight line – on declining inflation and declining interest rates, with some large swings in between, and since 2008, fueled by money printing and interest rate suppression.
But now we have the Fed’s fastest rate hikes in 40 years and the Fed’s fastest QT ever after they settled $381 billion in six months.
Mortgage rates followed a similar pattern. The interest rate on 30-year fixed-rate mortgages started to rise in early 2021 from a low of 2.65%. But not straight either. By April 2021 it had reached 3.18% and then declined to 2.78% by June 2021. At the end of December 2021, it was back at 3.11%.
And then, as the Fed ended QE and then hiked rates and then started QT, mortgage rates soared – punctuated by major bear market rallies, notably the summer bear market rally when the average 30-year fixed-rate mortgage rate fell 14% , from 5.8% to 4.99%, only to bounce back to 7.08% in late October. Since the Freddie Mac index released on Dec. 1, the rate has retraced some of that rise, falling to 6.49%. This corresponds to an 8.3% drop in average mortgage rates.
Since the beginning of 2021, we still have an unbroken uptrend in the 30-year fixed-rate mortgage rate, characterized by higher highs and higher lows, and a further decline would still fit nicely into the overall uptrend:
The trend is your friend. There was a huge amount of Fed pivot demonstration and rate cut demonstration and Fed-will-restart-QE-soon-soon demonstration etc. All of this is part of the normal game as markets adjust to new realities with each side pushing in its own direction, thereby pushing markets up and down in volatile ways. But this is how functional markets adapt to new realities. Adjustments don’t happen all at once. And if it does, it’s a really scary affair. Nor do they adjust in predictable straight lines. They take it in their rough and tumble way over time, but eventually they get there.
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