What’s Going On Here?Data out this week showed applications to refinance mortgages rose 20% last week compared to the week before, as US homeowners scrambled to get ‘em while they’re cheap (tweet this). What Does This Mean?On the one hand, this data from the Mortgage Bankers Association is only to be expected: brokers take time off over the holidays, so the first week of the year is always busy. On the other hand, it’s pretty unique to the times we’re in: the jump coincided with an increase in the average interest rates of 30-year fixed-rate mortgages, as well as with 10-year US government bond yields rising above 1% for the first time since last spring. So the New Year’s busy, sure, but there were almost twice as many applications as there were this time last year… Why Should I Care?The bigger picture: Biden their time.
A new US government will take over next week, and investors are expecting more spending announcements not long after. So between those measures and potentially economy-stabilizing vaccine rollouts, there might soon be a boost in economic growth and inflation – and with it, interest rates. That would make borrowing money – mortgages included – more expensive. It might not happen particularly soon, mind you: data out on Wednesday showed inflation in December was in line with economists’ predictions.
For markets: Take stock.
Goldman Sachs reckons all this is bad news for stock prices in the short term – even though they hit new record highs last week. See, just the prospect of higher interest rates is enough to persuade government bond investors to sell off some of their holdings in hopes of buying new, higher-returning bonds in the future. That pushes bond prices down and yields up – and since US government bond yields are a key benchmark, other bonds’ yields rise too. In other words, it becomes more expensive for companies to repay their debts, potentially damaging their earnings and, in turn, their share prices. | 