The Federal Reserve raised interest rates by 0.75% today, slightly increasing 30-year fixed mortgage rates. Interestingly, these two things are completely unrelated.
The Fed Funds Rate (which the Fed “raises” when it hears about the Fed rate hike) applies to overnight loans between major financial institutions. Certainly important, bonds market securities change every second, but only 8 times a year.
There are all sorts of ties. US Treasuries are a classic example. The 10-year US Treasury yield is the world’s most popular long-term interest rate benchmark. There are also bonds that underlie the mortgage market (MBS or mortgage-backed securities). They tend to move like US Treasuries. There are even bonds that traders use to bet on future levels of the Fed Funds Rate.
With that in mind, the bond market has long since assumed the Fed will hike rates by 0.75% today, and when a 0.75% hike actually happens, it will have no impact on the rest of the bond market. No. In fact, Treasury and MBS improved initially.
The improvement was due to a change in wording in the Fed’s policy statements. Traders were hoping to get some indication that the Fed was close to discussing slowing rate hikes. It was a very cautious statement, but today’s announcement definitely provided such a hint. Unfortunately, it wasn’t the last thing the Fed had to say today.
In addition to the statement itself, there is also a press conference by Fed Chair Powell. While the Fed has confirmed it will discuss the pace of rate hikes at its next meeting (December), it is clear that inflation has been sustained and why it makes the Fed’s rate hike outlook even higher in December than in September. Possibly (when they last published rate forecasts).
Both stocks and bonds were put up for sale on the news (selling bonds means higher interest rates, all other things being equal). Most mortgage lenders have raised interest rates during the day. The shift wasn’t extreme in the context of other recent moves, but it’s still not what everyone wanted to see after the coast seemed clearer after the first policy announcements. was.
Aside from today’s volatility, a more significant event for bonds/rates is yet to come. Ultimately, the Fed is only responding to changing economic data when determining the pace of rate hikes. If Friday’s jobs report shows a rise in unemployment or his CPI data next week shows a fall in inflation, interest rates could easily find footing and move lower. Unfortunately, the data can go down in both directions (i.e. stronger than expected, interest rates can go up).