Pro Perspectives 4/18/23

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April 18, 2023
Let's take a look at mortgage rates.
As you can see in the chart below, the spread between the 30-year fixed mortgage rate and the U.S. 10-year Treasury yield is at extremes.  It runs about 2% on average, over this 20-year history.  It's closer to 3% at the moment. 

The blowout of this spread was triggered by the Fed's early telegraphing of an 80s, Volcker-like inflation fight.  That type of response would have entailed a double-digit Fed Funds rate.  Thankfully (for the economy) that didn't happen, but mortgage rates took the cue, and doubled at the fastest rate in history.  
Of course, another driver of this spike in mortgage rates was the Fed's stated intent to shrink the balance sheet, which would (expectedly) entail reducing its position (its bid) in the mortgage-backed securities market.
That said, the Fed was noticeably very cautious in its attempt to trim the $2.7 trillion mortgage portfolio.  It was four months into the "quantitative tightening" program, before they even made a ripple in their mortgage holdings.  Still, they are well behind on the planned asset sales, and probably for the reasons exposed in the chart (i.e. the risk of further disconnecting mortgage rates from the broad interest rate market, and therefore breaking the housing market).
We've already seen the Fed's response to its self-induced banking crisis:  They started buying Treasuries again. 
I suspect, soon, the Fed will have to start buying mortgages again, too (to normalize the spread).  The catalyst:  the trouble brewing in commercial real estate. 
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