Interest and Mortgage Rates Are Rising – Will It Continue?
July 11, 2023
There’s been a sharp increase in interest rates in June from 3.5% to 4% on the 10-year government bond.
That’s a big increase, especially in a month where the Fed paused its overnight lending rate increases for the first time in over a year.
Why the big increase?
Likely it has to do with the lifting of the debt ceiling. Once the ceiling was lifted, the Treasury sold almost $1 trillion of bonds in June to fund the backlog of payments it needed to make.
Plus, the Federal Reserve isn’t buying bonds anymore. In fact, it has been selling bonds ever since late March. However, that selling comes after a massive $400 billion purchase of bonds in early March to help bail out banks after Silicon Valley Bank went under.
So, there hasn’t been any NET selling since the beginning of March. That said, the Fed has now sold off ALL of the money it printed in early March is in a net selling situation going forward.
Will it keep up its recent torrid pace of bond sales going forward (about $125 billion per month), now that it has sold all the bonds it bought to bail out banks? Hard to say, but I would lean toward thinking they will continue to sell at least $50 - $75 billion a month for a while.
As for the Treasury selling more bonds, it has to keep selling $150 billion a month just to fund current deficit needs. The good news is that it is likely through most of the pent-up demand for selling bonds.
Still, none of this is good news for interest rates going forward. Sure, less upward pressure, but no downward pressure at all.
Hard to say exactly where interest rates are going now because the bond market isn’t responding purely to fundamentals these days. But I would guess that, at least for the next few months, mortgage rates and interest rates will remain high, but won’t increase that much more.
However, if rates do go much over 4%, that will cause some pain for real estate and the stock market. I’m not sure how much, but eventually, the Fed will be forced to print to help keep rates from going much over 5% which would definitely hurt both stocks and real estate.
That’s the reality for the Fed every day because Congress and the President have little interest in controlling deficits.