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Market Update | October 22

Market Overview

Market Overview

Many stocks hit record highs this morning, but most have since dropped into negative territory in response to comments this morning from Fed Chair Jerome Powell about beginning tapering soon. MBS bond prices have improved this morning, but did not regain the full ground they lost when the MBS market sold off yesterday afternoon. After yesterday’s sell off and today’s smaller rally, the net impact is that MBS prices are about 12.5 – 25 basis points worse in price this morning than they were at this time yesterday morning. The Dow Jones and S&P 500 hit record highs this morning but have since traded into negative territory. The Nasdaq has been down all morning after Facebook stock dropped based upon Apple privacy concerns that have surfaced this week. The Dow Jones is up 0.21%, the S&P 500 is down 0.173%, and the Nasdaq is down 0.84%. The key drivers in the markets today are comments by Joe Biden that he might not put corporate and/or personal tax increases into his proposed infrastructure bill. He would need 50 Senate votes in order to pass any tax increases, and moderate Senate Democrats are not on board for large tax increases. Supply chain bottlenecks and the expectation of higher inflation for the next five years are key worries hanging over the markets today, in Europe and in the U.S. European companies are passing the higher costs onto consumers, which is causing political backlash for European central banks to begin raising rates. All of this is creating an upwards pressure on U.S. interest rates. The markets are expecting a near 100% certainty that the Federal Reserve will formally announce the beginning of tapering in their November FOMC meeting. The tapering is expected to start in November or December and continue until June of 2022. The impact of tapering will be to raise mortgage interest rates. The second move the Fed can do is raise the 1-day overnight Fed Funds rate which is the 1-day loan that member Fed banks make to one another when they have excess deposits at the end of each business day, which is paid back first thing the next morning. The Fed is expected to taper bond purchases now, impacting mortgage rates, and then waiting longer before they start to raise the 1-day Fed Funds rate. This could cause confusion with consumers who see media headlines and may not understand this nuance between bond tapering and the Fed Funds rate. I.e. media headlines will likely say the Fed is keeping rates near zero until the second half of 2022, and consumers could think this means mortgage rates will stay low, when in fact they will likely be rising. In summary, mortgage rates have been rising and are likely to continue to do so into next year. The 1-day Fed Funds rate will drive up short term rates such as the Prime rate which most HELOCs use, but this will not likely happen until later in 2022, with more increases predicted in 2023. MBS prices are slightly better in all coupons from where they closed at the end of the day yesterday, but they are worse now than they were at this time yesterday morning when yesterday’s rate sheet. Today’s rate sheet is slightly worse than yesterday morning’s rate sheet. The 10-year Treasury yield 1.655%, after going above 1.70% yesterday. This yield is on the high end of its 5-day trading range.

Market Details


Fed Tapering. Federal Reserve Chairman Jerome Powell said this morning that the Fed should begin tapering soon. The Fed is currently buying $120 billion per month of Treasury and MBS bonds each month. As these daily purchases begin to decline, this will cause MBS prices to drop, through the normal market forces of supply and demand. As MBS prices drop, this will mathematically drive up the yields on the bonds, which pushes up mortgage interest rates. Powell did say the Fed should wait longer before pushing up the 1-day Fed Funds rate because the job market has not yet fully recovered. He said he believes inflation rates will drop as supply chain bottlenecks are resolved. Inflation. One way to measure the market’s expectation of future inflation rates are TIPS bonds which allow investors to make bets or hedge the risks they face with increased future inflation. The daily price levels of TIPS bonds provide insight into how the markets are forecasting and pricing future inflation rates. Based upon today’s trading levels, the TIPS bond market is showing a market forecast of a 2.94% inflation rate for the next five years. If this is correct, borrowing on a 30-year fixed rate mortgage with a rate in the 3’s is almost like borrowing for a net cost not much above zero. The mortgage borrower is paying back their loan with future dollars that are worth about 3% less every year, very close to their annual interest rate. Even if mortgage rates move to 4.00%, a borrower is effectively paying only a 1.00% net effective rate of interest if inflation is around 3.00%. A 30-year fixed rate mortgage is still an incredible financial opportunity for a borrower. Next Week’s Reports. There are no material economic reports scheduled for Monday. On Tuesday we will see the Consumer Confidence report and New Home Sales in units. The markets are expecting a 108.3 Consumer Confidence index, which would be a drop from September’s 109.3 index. New home sales for September will be released with the markets expecting 755,000 units, up from August’s 740,000. If both of these reports come out higher than these predictions, this would cause an upwards pressure on stock prices, a downward pressure on bond prices, and an upwards pressure on mortgage rates. Floating. Floating in the 2021 market continues to remain a very risky proposition. The borrower choosing to float even for a few days is taking a less than 50/50 bet every day to get a better rate versus a worse rate. The majority of borrowers who have floated this year have made a bad bet and received a worse rate than if they had locked early in the process. A rate lock is a powerful and valuable benefit for a borrower, particularly in volatile markets like we have today and will likely have for the rest of this year. Borrowers should carefully evaluate the downside risk if they are considering floating in this market. There is no such thing as “carefully floating’’ in a market. MBS prices can drop large amounts with zero warning.

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This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company.

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