Everyone's Talking About Rates, But Not For All The Right Reasons
So far this year, interest rates (including mortgages) have spiked at the quickest pace since the US presidential election. They're currently at levels not seen since early 2014. It was all anyone in financial news could talk about this week, but some of that conversation should be taken with a grain of salt.
I'm not here to minimize the impact of the rate spike. There's no doubt that it's been quick or that it brings rates into unpleasant territory. The move has also been more methodical and determined than past examples of big rate spikes. Bond markets (which dictate rates) spent the 4th quarter winding up for the next big move in a very linear consolidation pattern (red dotted lines below) centered on 2017's previous highs (red circles). When rates finally broke out, there was no question as to which side they'd chosen.
The methodical and determined nature of the move is one of the problems. Market commentators prefer to pin big moves on clearly-defined, individual events or phenomena. For instance, following the election, the best guess was that Trump's probable policy path would create growth, inflation, or simply more bond market supply than traders wanted to buy. All of the above were logical reasons for the quick spike in rates. While a lot more could be added to that conversation, there was no question about the catalyst because more than half of the damage was done in the 3 days following the election.
This time around, there's no similar example of concentrated movement following a major event. It's really been a team effort. Still, there are a few usual suspects to examine any time rates make a big move without an immediately apparent motivation.
The first suspect is inflation. Higher inflation (actual or expected) pushes rates higher, all other things begin equal. So it's only logical to take a hard look at inflation if we're having a hard time explaining a rate move. But while inflation expectations are certainly a factor in the current move, a closer look quickly shows us it can't possibly be the only motivation.
The following chart breaks out the 10yr Treasury yield (the quintessential benchmark for longer-term lending rates in the US) into an inflation-adjusted component, and an implied inflation component. In other words, rates are essentially 2 things: inflation expectations and everything else. Adding them together gives us the actual 10yr yield. As seen in the chart, the non-inflation component still accounts for most of the post-election rise in rates. It also accounts for more of the abrupt move seen so far in 2018 (the inflation component has been moving higher more steadily and for longer, by comparison).