Financial Markets Signaling that Interest Rates are to Change

In recent weeks, financial markets have been signaling that stagnant interest rates are about to change – with or without action by the Federal Reserve. What makes it look like markets have decided it may be time to break out of the holding pattern?

  • Following Fed Chairwoman Janet Yellen’s speech at the Jackson Hole Symposium in late August, interest rates moved lower at first. Then, rates moved higher quickly as the remarks were interpreted to mean the Fed would raise rates sometime during the remainder of 2016.
  • The big jobs report came in below its forecast–something that would normally help rates move lower, or at least hold their ground. Instead, rates began rising back toward recent highs, suggesting that markets may be have simply decided “it’s time” to break out of the holding pattern.

The recent rates swings seem almost arbitrary, when compared to June when Brexit and a bad jobs report caused market volatility. This may well be another indication that the markets have run out of patience with interest rates that remain in such a narrow range.

What does all this mean for the housing market?

Since mortgage interest rates track closely with yields on 10-year Treasury Bonds, a break out by the markets may send mortgage rates higher. Higher rates may impact affordability for certain home-buying segments and higher rates typically reduce refinancing activity. Higher mortgage interest rates can also have a psychological impact that seems to dampen enthusiasm for home-buying. Over the last 15 years, the most notable changes in the Pending Home Sales Index have followed major Federal Reserve policy actions.

There’s one last thing to keep in mind, though. By historical standards, mortgage interest rates would still be quite low – even if rates rise during the last quarter of 2016. Once consumers realize that the cost to borrow is still relatively low, higher mortgage rates may have relatively mild impact on the U.S. housing market.


Source Material
Markets Forcibly Extract Fed’s Message. Louie Colatriano. US Housing and Mortgage Market Weekly. Web. 02 Sept. 2016. Web. 10 Sept. 2016.

- By Michael Kearney, Sep 27, 2016