The rate of increase in long-end U.S. Treasury yields and residential mortgage rates of the past few weeks is the fastest pace in history. The previous record rate of increase occurred during the "taper tantrum" of 2013. The records prior to that were set in 1994 and 1980. I discussed these issues in many columns during the 2013 taper tantrum and suggest reviewing the column, "Mortgage Rates Are Rising Faster Than Ever," and the previous columns referenced in it to get a feel for what is likely to occur this time.
We had a similar but lesser bond market panic in 2015 as expectations for a Fed rate hike increased throughout the year. In both the 2013 and 2015 events, as soon as the respective taper began and rate hike occurred, bond traders reversed course and started buying again.
Instead of buy on rumor and sell on fact, bond traders sold on rumor and bought on fact.
In the second half of 2013, in between the time then-Fed Chair Ben Bernanke announced that tapering was probable, and the end of the year when the process began, the 10-year U.S. Treasury yield moved from about 1.65% to 3%.
As soon as the tapering started, the process steadily and fully reversed by the end of 2014. As 2015 began, bond selling started again with the 10-year yield rising to about 2.2% when the Fed raised rates in December.
And again, within days of that occurring, bond buying resumed with the 10-year yield ultimately reaching a new record low of about 1.36% in July of this year.
At the time the prevailing meme was that a vote for Brexit would signal an imminent global economic crisis that warranted buying Treasuries. When the Brexit referendum was voted on the 10-year yield was about 1.55%. As soon as Brexit was affirmed by British citizens the yield plunged to 1.36% over 10 trading days and then immediately began to rebound as those same bond traders realized the world wasn't going to end.
They then focused their attention on expectations of the next Fed rate hike and the fact that both U.S. presidential candidates were promising fiscal stimulus.
The ludicrously nonsensical prevailing memes now driving yields up are that the U.S. economy is so strong that the Fed has to raise rates to pre-empt inflation while simultaneously being so weak that fiscal stimulus is needed to prevent deflation and that such stimulus is imminent.
Those memes have revived again the idea that the 30-plus-year bond bull market has ended and a period of secular reflation and inflation has begun that will surely be achieved by fiscal measures successfully providing the catalyst for growth that monetary measures of the past eight years didn't create.
The problem with this logic is that nothing about the domestic and global economic trajectories has been changed by the election of Donald Trump.
As I reiterated in my last column, "Don't Count on Fiscal Stimulus From Trump," although fiscal stimulus will come, it won't come anywhere near as soon as the markets are pricing for now and won't have an economic impact for several months thereafter; i.e. sometime in 2018 at the earliest.
More immediately however, the move in bonds, which is pulling up mortgage rates at the fastest pace in history now, could crush the housing sector and the economic growth the bond market participants are anticipating.
During the 2013 taper tantrum one of the points of debate was whether or not there was pent-up housing demand and if there was whether the spike in mortgage rates would cause that demand to be actualized as buyers tried to purchase before near-record low rates rose.
We know now though that that didn't happen as home buying immediately crashed and didn't show signs of increasing again until mortgage rates dipped back down to near-record-low levels of this past summer.
Home buyers want 3% 30-year fixed rate mortgages and stop buying when the rates move to 4% or higher. That's not evidence of a choice being made by home buyers; it's evidence that affordability -- and thus demand -- is constrained by the carry costs associated with even slightly higher rates.
I think it's probable that at some point soon, as occurred in 2013 and 2015, perhaps after the FOMC's Dec. 14 meeting and probable rate hike, bond market participants will again realize all of this, start buying again, sending yields below the record levels of last summer.
