FAQ RISING ’ S RATES
RISING RATES AND RECESSION – WHAT DOES IT MEAN TO YOU ?
BY : BARRY HABIB
THANKS TO THE FEDERAL RESERVE ’ S reduction in its reinvestment of Mortgage Bonds and Treasuries , as well as an uptick in inflation , we have seen a noticeable move higher in interest rates . This has caused refinance volumes to drop to their lowest levels in over a decade . Add to that low inventory levels of homes for sale and we see application volume down for most companies . The excess capacity and fierce competition have led to margin compression . When does it end and where does it go ?
will continue to hike rates , which will put upward pressure on the shorter term two-year Note . This means there is a very good chance that the yield curve gets inverted — meaning the two-year yield rises above the ten-year yield — within the next year . That ’ s important because , as the chart below illustrates , an inverted yield curve is an early warning sign of a recession ahead . Notice how every time the yield curve inverts ( red areas ), recessions follow .
It ’ s true that rates have risen . But make no mistake , rates are still really , really good . Look at the chart below to gain some perspective on just how terrific mortgage rates are on a historical basis . Your clients may benefit from this :
As mentioned , the reduction in Fed buying has pressured rates to the upside . There will be one more reduction coming in October , which should continue to move rates a bit higher still . Additionally , inflation , while mild , appears to be persistently creeping higher . Inflation is the archenemy of Bonds because it erodes the buying power you get from the fixed payment return . These factors will be a headwind for mortgage originators . The best way to overcome this is to articulate the opportunity in the still very healthy Real Estate market . The benefits received from appreciation and amortization dwarf the additional cost from higher rates . An advisor can help clients focus on what ’ s important .
We have been forecasting a recession around the year 2020 . We have two reasons for this . First , the flattening of the yield curve between the two-year Treasury Note and 10-year Treasury Note . Notice in the chart below how the difference between the two has been shrinking . About four years ago , the 10-year Treasury was yielding approximately 2.75 percent more than the two-year Treasury . But the spread between the two has persistently shrunk to its current levels near 0.25 percent . The Fed has told us that it
Another reliable recession indicator is the bottoming out of the unemployment rate . One of the first things that companies do when the business climate slows is to cut costs by letting people go . A look at the chart below shows a 100 percent correlation since WWII , where the bottoming out of the unemployment rate is an advance indicator of a recession . We are not saying that we are there just yet , but we are a lot closer to the bottom of the unemployment rate than we have been in a long time .
While a recession is never something we ’ d want , because it will adversely affect some families , it as a period that coincides with lower interest rates . This is because the Fed ’ s main tool to stimulate the economy is to lower rates or institute Quantitative Easing . This will result in lower mortgage rates and a highly probable opportunity for refinancing during this period .
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