“Nothing goes in a straight line.” Likewise functional markets adjust to a new reality: high inflation, high rates,
By wolf richter For wolf street,
There has been a lot of talk and scrambling and Fed-pivot speculation about the 10-year Treasury yield falling from 4.25% in late October to 3.51% at the close on Friday from 4.25% in late October. This is a decline of 74 basis points. In percentage terms, the yield has declined by 17%. A fall in yield means a rise in the prices of these securities. So this fall in yields represents an uptick in prices.
But here’s the thing: During the summer bear-market rally, the 10-year yield fell 25%, from 3.49% to 2.60%. Earlier, there were some smaller rallies in the beer market. But the biggest bearish rally during this bond bear market was from April 2021 to August 2021, when yields fell 30%, from 1.70% to 1.19%.
The 10-year yield closed at 0.52% on August 4, 2020, marking the end of a 39-year bond bull market. Since then, the 10-year yield has risen sharply, with big surges followed by small retracements, large surges, small retracements, etc., obeying Wolf Street’s dictum that “nothing fits in a straight line, The 10-year yield, as it went up, marked higher highs and higher lows each time. And the current bear market rally fits well, and the yield could fall further, and it would still fit well:
Back in August 2020, the 10-year yield hit an all-time low of 0.52% — after months of extensive hype by bond- and hedge-fund kings, queens, and gurus in social media, on CNBC, and on Bloomberg that the Fed would push interest rates into negative, just as central banks did in Europe and Japan.
This was an attempt to manipulate people into buying a 10 year security with almost no yield, causing yields to fall further, and prices to rise further, so that the said kings, queens and gurus could get a lot of money .
Anyone who bought the 10-year maturity at that time got a really bad deal, as it marked the bottom of a 39-year bond bull market, during which the 10-year yield fell from 15.8% in September 1981. It fell to 0.52% in August. 2020 – and not in a straight line – on declining inflation and declining interest rates, with some major wobbles in between, and fueled, since 2008, by money-printing and interest-rate suppression.
Mortgage rates followed a similar pattern, The 30-year fixed mortgage rate began rising in early 2021 from a low of 2.65%. But not even in a straight line. By April 2021, it had reached 3.18%, and then it was back to 2.78% by June 2021. By the end of December 2021, it was back to 3.11%.
And then as the Fed ended QE, and then raised rates, and then introduced QT, mortgage rates went up — interrupted by big bear-market rallies, especially the bear-market rally in the summer. That’s when the average 30-year fixed mortgage rate declined by 14%, from 5.8% to 4.99%, only to rise again to 7.08% in late October. There has been some growth in rates, according to Freddie Mac’s index released on December 1, which fell to 6.49%. This represents an 8.3% drop in average mortgage rates.
Since the start of 2021, we still have an unbroken uptrend of the 30-year fixed mortgage rate, marked by higher highs and higher lows, and another decline would still fit nicely into the overall uptrend:
the trend is your friend, There has been a great deal of Fed-pivot and rate-cut hype and Fed-will-restart-QE-soon hype. It’s all part of the normal game of how markets are adjusting to new realities, with each side pushing in their own direction, pushing markets up and down in volatile ways. But this is how functional markets adjust to new realities. Adjustments do not happen simultaneously. And if they do, it’s a really scary affair. And they don’t even adjust in predictable straight lines. They go their rough and tumble way over time, but eventually, they get there.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it very much. Click on the Beer & Iced-Tea Mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? register here,