Due to economic growth, mortgage rates reached a four-year high. Several big picture factors place a negative impact on long-term bond yields. For months, investors concerned themselves with many of these factors.
Why Mortgage Rates Reached a Four-Year High
While it is not unreasonable that mortgage rates reached a four-year high, it is challenging to understand why. Over the last couple of weeks, there have not been any major sets of economic news. This adds to the uncertainty regarding the situation.
The United States Treasury issues bonds. Lately, the supply of bonds issued by the Treasury is increasing. Many analysts attribute this to larger government deficits. Over time, the United States deficit increased alongside policy changes. Second, the new policies potentially lead to faster economic growth. As a result, the United States shares the potential of seeing an increase in future inflationary pressures.
Investor Expectations for the Federal Reserve
Beyond the previously mentioned factors, mortgage rates reached a four-year high because of investor expectations. Lately, investors increased their expectations for the pace of tightening by the Federal Reserve. As of right now, investors assign roughly a 50% likelihood that the Fed raises the federal funds rate four times in 2018. Compared to the beginning of the year, this number dramatically increased as of late.
In addition, the Fed reduced reducing its enormous holdings of United States Treasuries. The Federal Reserve intends to do the same for its large supply of mortgage-backed securities. In doing so, the Federal Reserve adds to the supply of bonds.
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