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Where Are Rates Headed?

The Federal Reserve began the mortgage rate frenzy when COVID first began. They did two things of note:

  • Lowering their interest rate from 2.25% to .25%
  • Spending $120 billion-a-month in bond purchases

10 Year Treasury note

The question is when will it end, and can you stay on top of it as it happens. It seems the most reasonable tracker of where rates are now and where they are headed, at least in the short term, is the 10 Year Treasury note. Comparing rates throughout the pandemic, when the 10 Year Treasury was in the 1.1% range rates they were the lowest we have seen, and as it has risen since, so have rates. It is not an exact correlation, but it gives you an idea of the direction things are headed.

In theory, until The Federal Reserve raises their .25% rate (and word has it that will be a gradual increase as well) there is no reason to see rates increase. Frankly, the industry could have offered even lower rates than we have seen during the pandemic. Supply and demand may have been a factor.

Tapering Stimulus

By now, most have heard the term “tapering stimulus” with reference to The Federal Reserve. This means the $120 billion per month is going to be slowly reduced or tapered until it is no more. At present, the Fed’s plan, after their November 2-3 policy meeting, starting later that month will reduce monthly purchases by $15 billion, and each month after until it reaches $0. So in 8 months from November, it should end.

Inflation Rate Landmark

As inflation has been over 2% for 7 months, the Federal Reserve could start raising rates in 5 more months, if monthly reports remain above 2%, but the most current plan is to wait until the tapering is over to begin raising them. That may have bought us another 3 months.

Bond Markets Responding

However, the U.S. bond markets have started to reflect expectations of interest-rate increases by the Fed next year. Last week, the probability of at least two rate rises by the end of next year rose to 75%, according to futures market prices tracked by CME Group. That was up from around a 20% probability at the conclusion of the Fed’s meeting last month.

Inflation Caveat

So we are starting to see bigger moves in the 10 Year Treasury, which of course could turn around based on newer, more current data. “If we are still seeing 4% inflation or in that area next spring, then I think we might have to reassess the speed with which we would be thinking about raising interest rates,’” Fed governor Randal Quarles said last week. Inflation peaked 2.6% in March, has been in the 4s for 2 months after and in the 5s for the last four months. If the pattern continues it may delay raising the Fed’s rate even longer.


All we do know is rates will go up eventually. We have seen small increases over the last few months, but they could continue to rise and fall as we get closer to the Fed’s timelines. Inflation rates for the year ending the previous month are released on the 15th of each month. Keep an eye on those numbers and watch the 10 Year Treasury note. A sharp drop may indicate lower rates, or it may take the industry a day or so to catch up. A sharp rise may mean the same. When the tapering starts there will likely be a reaction in the stock market but it may or may not push the 10 Year and mortgage rates.

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