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IT’S BEEN A STUNNING quarter for the bond market. According to Bloomberg, short-term interest rates have seen their biggest jump since 1984, as measured by the yield on two-year Treasury notes, which now stands at around 2.3%.
The rise this time around seems especially sharp, considering how low yields were at the start of 2022. Back in the early 1980s, the two-year Treasury yielded north of 10%, versus barely above 0% at times last year. We could see yet more bond market volatility, with key data points such as final fourth-quarter gross domestic product and March’s employment report hitting later in the week.
One consequence of rising yields has been higher mortgage rates. Consumers can get updates on conventional loans each afternoon. Friday’s update was particularly jarring: The 30-year conventional fixed-rate mortgage nearly touched 5% and is now at its highest level since late 2018. Freddie Mac also publishes a weekly report on Thursdays. Should mortgage rates climb much above 5%, that would mark the highest borrowing costs in more than a decade.
For potential home buyers, soaring property prices are adding to their misery. We’ll get the latest reading on the S&P Case-Shiller U.S. National Home Price Index on Tuesday morning. The consensus estimate says home values rose 18.3% over the 12 months through January.
Consumers aren’t exactly taking the rising interest-rate environment, triggered by high inflation, in stride. February’s University of Michigan consumer sentiment reading of 59.4 was the bleakest since August 2011’s 55.8. That’s when the U.S. debt downgrade occurred and the European sovereign debt crisis was ongoing. Despite low unemployment and somewhat resilient stock prices, rising consumer prices and unstable geopolitical conditions continue to weigh on consumers.
The first quarter has been no cakewalk for stock investors, either. The good news is that the volatility index is close to its lowest reading since January. That means daily stock market swings should be calmer in the coming weeks. Maybe stocks are beginning to price in better times ahead.
It may be “stunning” but the Fed’s intention to fight 7% inflation by raising fed funds rates has been stated for months. What is stunning is that rates were so low for so long. The mortgage rate increase could take some of the steam out of the housing bubble.