My weekend column elicited a few requests for clarification of some of the issues I raised, so I'll address those in this column and add the issues I edited out of that column's first draft.
I noted that long-end U.S. Treasury yields had risen while mortgage spreads had shrunk and mortgage rates had been stable, adding that I thought those trends will continue.
However, I did not mean that I expected long-end Treasury yields to continue increasing. In fact, I think the long-term secular trend for lower yields is still in force and that they will decline to record lows.
As that occurs, though, I do not think that mortgage spreads will increase and prevent mortgage rates from declining. I think it's more likely that mortgage spreads, mortgage rates and Treasury yields will decline together until next spring. Spreads will keep tightening because of the increase in mortgage-backed securities (MBSs) afforded by the increase in purchase-money mortgages as first-time home buyers re-enter the market.
That trend will accelerate as a result of mortgage rates continuing to decrease, which helps to set the stage for a generational shift in the desirability of becoming homeowners.
Since June when I started writing about the potential for that to occur, the two homebuilders I've focused on as best positioned to benefit from it, Beazer Homes USA (BZH) and Hovnanian Enterprises (HOV) , are up about 42% and 11%, respectively. I think their rebounds are still in the early stages and that both will continue rising, with Hovnanian's performance catching up to Beazer's.
One of the other points I made in that June column was that there's been little discussion over the past year concerning the failure of monetary policy to affect the real economy. That issue has been almost completed overshadowed by the debate concerning the appropriateness of the Fed raising rates again soon and the logic for doing so.
Interestingly, as noted by Business Insider, Citi Research analyst Hans Lorenzen offered a similar critique, noting that the ability of monetary policy to be economically stimulative has been exhausted globally. This may mark the beginning of other high-profile analysts noting the same and supporting a nascent push this year, especially by global central bankers at the Jackson Hole Symposium, for a fiscal response to do what monetary policy has been unable to do unilaterally, especially in the U.S.
While it's stating the obvious, it's important for the obvious to be stated publicly, especially by representatives of the Fed and the largest banks, to encourage a coordinated fiscal response by Congress and the next administration. Regardless of what form a fiscal response takes, the Fed will have to fund a big part of it. However, this does not mean the Fed has to resume quantitative easing. The easiest initial path would be for the Fed to divert capital flowing from maturing agency MBSs to the issuance of new Treasurys to fund the fiscal response, rather than back into new MBSs to support housing.
If the nascent demand for housing by first-time home buyers keeps increasing, the private MBS market will likely not need or even want the Fed's support for mortgage spreads to keep tightening.
I don't know if that will be the Fed's plan and haven't read any research suggesting such. But in my opinion it's the most logical policy path now. It would let the Fed support a fiscal policy initiative without increasing its balance sheet. In so doing the Fed could keep raising short-term interest rates while simultaneously exerting some control over long-end rates.
The $64,000 question remains what form a fiscal initiative will take.
Although both presidential candidates have proposed infrastructure programs, the political viability of such is questionable and is the primary reason infrastructure stocks moved sideways for the past three months after surging earlier this year.