Supply and Demand Forces Driving Rates Higher

After a brutal day in the stock market on Friday, the equity market is once again falling sharply. The forces most are stating as a reason is fear of more rapid interest rate hikes coming from the Federal Reserve. Given that the US stock market has continued to climb even under the pressure of Fed rate hikes, it seems odd that fear of more rapid hikes would create such panic in the minds of investors. It seems to me that we are seeing a technical move lower that is building as investors continue to sell their stock holdings out of fear. It’s been too long since stocks have pulled back. This is a healthy and needed move. Stocks just can’t sustain the rate of growth they experienced without taking a break. 

Bonds continue to search for a floor that can stop the current channel of losses. Mortgage bonds are once again at a critical level that will help decide the near-term direction of mortgage interest rates. The issue is one of supply and demand. Budget deficits are at record highs, which means the US government has been borrowing record high amounts of money in the form of selling debt on the open market. With the Fed reducing the number of treasuries they are purchasing, this has greatly reduced the demand. Further, with the US dollar losing value, it has caused foreign investors to become net-sellers of US debt. This further reduces the demand. With supply of debt increasing and investors’ appetites reducing, the only way to attract investors is to offer higher rates. This drives overall interest rates higher, including mortgage rates. 

With bonds still searching for a floor of support, we will maintain our locking bias.