A bad day for rates – mostly because they look like they will keep going up in 2017. Elective sellers won’t budge until they get 1-2 years’ worth of proof that the market won’t support their price.
Mortgage rates skyrocketed (relatively) following today’s rate hike from the Fed. It wasn’t the rate hike itself, however, that markets find most troubling. In fact, the hike was almost universally expected. Rather, this was one of the 4 Fed meetings of 2016 that included updated economic projections (sometimes referred to as “the dots” due to the dot-plot chart the Fed uses to show where members see the Fed Funds rate in coming years).
Today’s dots showed that the Fed now sees an additional rate hike in 2016 compared to the last set of projections. Longer term rates like mortgages and 10yr Treasuries had already adjusted for today’s hike, but they had not yet adjusted for any change in the dots. With time running out for traders to take advantage of liquidity ahead of the holidays, the race was on to sell bonds as quickly as possible. When traders sell bonds, it pushes rates higher.
Nearly every lender raised rates this afternoon–some of them multiple times. At first that took the form of mere increases in upfront costs (i.e. the contract rate itself wasn’t moving higher), but subsequent reprices added up to an eighth of a point in rate for several lenders. From a range of 4.125-4.25%, top tier conventional 30yr fixed quotes moved up to a range of 4.25-4.375%–well into the highest levels in more than 2 years.
To recap: this isn’t happening because the Fed hiked. This is a reaction to the shift in rate hike expectations among Fed members. It means they’re having a Matrix-eque moment where they’re “starting to believe.” In this movie, the belief isn’t about Kung Fu and dodging bullets, but rather about the ability to continue gently raising rates.