Good morning, all!
Last week the Treasury Department said it is going to buy back more of its own older bonds, the Fed published the notes from its July meeting, oil stayed elevated, and we got a weaker reading on new home construction. There is a little more to unpack than usual, so I want to walk through what each of these actually means for the people you are talking to, not just the headlines. Let’s get into it!
- Treasury Is Buying Back Older Bonds. That Is Not the Same as QE.
- The Fed Held Rates. The Meeting Notes Show Why They Are Still Cautious.
- Oil and the Middle East Are Still Doing Most of the Work on Rates
- Builders Slowed Down. Locally, Buyers Still Have Room to Negotiate.
- Weekly Rate Recap and What to Expect This Week
Treasury Is Buying Back Older Bonds. That Is Not the Same as QE.
Last week the U.S. Treasury Department announced it will increase what it calls liquidity-support buybacks. In plain English, the government is going to buy back more of its own older Treasury notes and bonds, the ones that do not trade as easily as the newest issues. The size of each of those operations moves from a $2 billion cap to at least $4 billion, starting September 9, and it is aimed at the longer-dated part of the market, roughly the 10- to 20-year and 20- to 30-year bonds.
This is the part I want you to have ready if someone asks, because the headlines will make it sound bigger than it is. They are buying Treasuries, which is just another word for U.S. government debt. They are not buying mortgage-backed securities, which are the bonds tied to actual home loans. That distinction matters. If Treasury were buying mortgage bonds, that would be a more direct attempt to push mortgage rates down. That is not what this is.
It is also not QE, or quantitative easing. QE is when the Federal Reserve creates new money and buys bonds in size specifically to stimulate the economy and pull borrowing costs lower. This is the Treasury taking older, harder-to-trade paper out of the market so that part of the government-bond market functions a little more smoothly. They pay for those purchases the ordinary way, through the regular auction calendar, so the overall pile of government debt does not magically shrink.
So, the question everyone is asking, will this set the stage for lower mortgage rates later? Only if it actually calms the long end of the Treasury market. Mortgage rates do not come from the Fed funds rate. They take their cue from Treasuries, especially the 10-year, and then lenders add a spread on top of that. If these buybacks keep Treasury yields from jumping around, that spread can stay contained and mortgage rates do not have to do extra work on top of an already elevated 10-year. If yields keep pushing higher anyway, the market is telling you the real drivers are still inflation, oil, and the amount of new debt coming to market, not a lack of liquidity. In that case this will not be the thing that opens the door back toward 6%.
The Fed Held Rates. The Meeting Notes Show Why They Are Still Cautious.
The minutes from the July meeting came out last week. The Fed held the funds rate at 3.50%–3.75% on a 9–3 vote. Three members wanted a quarter-point hike. That is not new. We already knew the room was split and has been for a while now. The useful distinction is this - “Many” participants said tightening would likely be needed if inflation does not come down. “Some” said financial conditions may not be tight enough yet to get inflation back to 2%. That is not a committee lining up to hike at the next meeting. It is a committee that will hike if the next inflation prints do not cooperate, and a smaller group that already wanted one in July.
For home buyers, remember that the Fed funds rate still does not set the 30-year mortgage rates. It sets the mood. A hold with that language is not a green light for lower mortgage rates. It is the Fed waiting on the data, with oil and the Middle East still being the gatekeepers to any changes.
Oil and the Middle East Are Still Doing Most of the Work on Rates
The bigger rate story has not changed much. The Iran conflict is unresolved, and oil has been hovering near $85 a barrel. As long as energy stays elevated, inflation stays in the conversation, and the bond market is slow to give back yield, which is another way of saying rates stay higher for longer.
For several months this has been a fairly simple relationship to watch. Elevated oil has gone hand in hand with elevated interest rates. Until that first domino falls, it remains the main obstacle to a real move lower in borrowing costs. The Treasury buybacks and the Fed minutes are important, but they are still the noise around that larger story.
Builders Slowed Down. Locally, Buyers Still Have Room to Negotiate.
July housing starts came out Tuesday. Housing starts measure new homes that have actually broken ground. That reading fell 12.4% to a 1.239 million annual pace, and single-family starts were down 9.9%. Building permits, which look a little further out, rose 5% to 1.443 million. So, builders are breaking less ground right now, but they have not shut off the pipeline of future projects.
Here in Greater Phoenix, Cromford and ARMLS still describe a buyer-leaning summer, not a frozen one. July closings were a few percent higher than last July and down from June, which is what the August heat usually does. Homes that do sell are coming in around 97% of the asking price. More than half of recent closings included seller-paid closing costs, often right around $10,000, and that credit can be used towards standard closing costs and as a rate buydown. The time it takes to get a home under contract is stretching into the high 40s, in days.
That is the opportunity for a well-qualified buyer, and it is the news to share with sellers and buyers alike. Buyers can come in a little below asking price, ask for help with closing costs or with the rate, and they have a little more time to think. The house still must show well and be priced like today’s market, not last year’s. It is also not one Valley - the Southeast Valley has been more negotiable. Higher-end Scottsdale and Paradise Valley have not.
Weekly Rate Recap and What to Expect This Week
Rates drifted a little higher last week and stayed in the same range we have been living in. Mortgage News Daily’s daily reading for a well-qualified 30-year buyer ended Friday at 6.77%, versus about 6.71% the Friday before. Call it the mid-to-high 6s depending on the day, the file, and the hour. Not a breakout lower, and not a shock higher either.
This coming week is a big one for the financial markets. We get Core PCE, which is the Fed’s preferred gauge of inflation. PCE stands for Personal Consumption Expenditures, and the “core” version strips out food and energy so they can see the underlying trend. That is the inflation number they talk about when they say they want something closer to 2%.
We will also hear from Fed Chair Kevin Warsh at the Jackson Hole symposium. Jackson Hole is an annual gathering in Wyoming where Fed officials and economists talk through policy, and it has a history of mattering when a Chair uses it to signal what comes next. This is Warsh’s first time there as Chair, so markets will be listening closely to the tone, not just the prepared lines.
We also get a fresh round of Treasury auctions, which is simply the government selling new bonds to raise money. With yields already elevated, we will be watching whether investors show up hungry for that new debt or demand an even higher yield to take it. Between that inflation report, Jackson Hole, and the new Treasury supply, the bond market will have plenty to digest. Stay tuned.
Source: Mortgage News Daily
As always, have a great week and please let me know if you have any questions!