Donald Trump’s surprise election victory sent US Treasury rates soaring, leading to a sharp rise in all types of loans, including mortgages.
US mortgage rates surged nearly half a percentage point last week to their highest level in ten months, as Donald Trump’s surprise election victory drove higher inflation expectations that could lead the Federal Reserve to adopt a more aggressive approach to policy tightening.
The average commitment rate on a 30-year fixed rate mortgage rose to 3.94% in the week of November 17, up from 3.57% the previous week, Freddie Mac reported in its latest survey. That was the highest since 3.97% in the week ended January 7. The 15-year fixed rate mortgage rose to 3.14% from 2.88%. The 5-year adjustable-rate mortgage averaged 3.07%, up from 2.88%.
The rout in US government bonds continued Friday, with the yield on 10-year Treasury notes settling at 2.337%. That represents an increase of more than half a percentage point over the past two weeks. Yields rise as bond prices sink.
With the latest rout, bond yields have reversed a large price gain following the June 23 Brexit vote, which sent the 10-year yield below 1.4%.
Economists speculate the president-elect’s proposed policies, which include sweeping tax reforms, lighter financial regulation and massive infrastructure spending, could result in stronger inflationary pressures. This is a unique challenge for the Federal Reserve, which has done everything conceivable to boost consumer prices since the 2008 financial crisis. Its efforts appear to be finally working. The consumer price index (CPI) strengthened to 1.6% in the 12 months through October, slightly below the 2% target. Core PCE inflation, the Fed’s preferred measure of price growth, held at 1.7% year-over-year in September.
The Fed, which has long advocated very gradual policy tightening, may be forced to accelerate its rate hike timetable should higher inflation become the norm. Central bank Chair Janet Yellen told Congress last week that Trump’s proposed policies could alter her views on inflation, but only “as it comes.”
The markets have already priced in a December rate hike. In fact, investors are almost certain of it. The CME Group’s 30-day Fed Fund futures prices, which convey the market’s views on US monetary policy, imply a more than 95% likelihood of lift-off next month.
While it’s still too early to assess Trump’s policy agenda, all signs seem to point to higher prices. Some experts argue that a protectionist trade agenda from Washington could be a major catalyst in a major shift toward de-globalization. Globalization may have its discontents, but it has also been the major economic paradigm in modern history. A move away from it could lead to very different economic realities that may result in short-term shocks to the financial markets.
As investors reassess their portfolios by hedging against the risk of higher yields, mortgage rates could become more susceptible to volatility. While yields remain very low by historical standards, the recent sharp rise is leading many bondholders away from long-term Treasury debt.
Although mortgage rates remain cheap, fluctuations in lending terms have been known to impede on home sales, especially in an economy churning out low-paying jobs. The silver lining is that wage growth finally appears to be accelerating. The US economy is also at full employment, at least on paper. Looking ahead, higher mortgage rates will certainly test the prevailing narrative that the US economy is on solid footing.
 Reuters (November 17, 2016). “U.S. 30-year mortgage rate hits 10-month high – Freddie Mac.”
 Min Zeng (November 18, 2016). “Rout in U.S. Government Bonds Deepens.” The Wall Street Journal.
 Bryan Rich (November 17, 2016). “Yellen’s Policy Path Should Help Fuel Trumponomics.” Forbes.
This article was written exclusively for GoRion.