Best price week in nearly two years, but there’s a catch

Mortgage rates have risen at the fastest pace in decades so far in 2022, but this week has proven to be a refreshing exception. To understand why, we first need to examine the relationship between stocks and bonds, which is a bit more variable than most people assume.

Conventional wisdom says that stock prices and bond yields correlate with each other. This makes good sense from the point of view of selling one to buy the other. For example, if you sell bonds to buy stocks, the bond yields and stock prices will rise together.

While we often see this correlation over short time frames, the longer term trends tend to be very different.

To make matters even more confusing, despite the inverse long-term relationship, there are certainly periods of time where investors move money from stocks to bonds, and vice versa. This week hasn’t been without flaws in this regard, but overall it has seen more of this kind of conventional wisdom.

20220513 nl3.png

As the highlighted parts of the chart indicate, we can see examples of conventional wisdom and the opposite type of movement in very close proximity to each other. In other words, sometimes the orange and blue lines move quickly in opposite directions even though they mostly follow.

Overall, one of the most common reasons to see stocks and bonds jump in opposite directions is Fed policy. Although the Fed applies monetary policy in the bond market, when the Fed’s policies are more flexible, the entire market tends to benefit. Conversely, when the Fed turns toward a more hawkish policy stance — as it has on multiple occasions over the past six months, both stocks and bonds tend to suffer.

The Fed did not make any policy changes on the morning of May 11th. Instead, it was the release of inflation figures for April that briefly led investors to fear further tightening from the Federal Reserve. Inflation, after all, is the main reason for the Federal Reserve’s big turnaround in 2022.

20220513 nl5.png

There are several ways to measure inflation. The chart above is just one of the numbers released this week. Although it was slightly lower compared to the previous reading, economists had been expecting a further decline. This triggered a temporary backlash that sent bond yields higher and stocks lower.

There was additional weakness in equities and a renewed improvement in bonds, but the trend was reversed on Friday as stocks stabilized midweek. Bond yields rose at the same time, but not at the same pace. In fact, even after the losses, it was the best week of the year for bonds so far – at least when it came to the pace of improvement.

Bond yields are closely related to mortgage rates. A strong week for bonds meant a strong week for mortgages. Even after rates rose on Friday, it was still the best weekly improvement in nearly two years. The caveat is that such a feat was only possible with prices that started the week at the highest levels since 2009.

Note: There are many news stories that point to price action Top This week due to the spread of Freddie Mac’s weekly mortgage rate survey as a source for news outlets. Freddy’s data is fine as long as it is understood. Specifically, the majority of survey responses are received on the Monday of any given week, but the results aren’t released until Thursday. This means that it usually ends up with the number “two versus two”. In fact, Monday’s rates were higher than last Monday’s, but the point is that when we look at the actual daily offerings, this Friday was a little better than last Friday.

20220513 nl4.png

%d bloggers like this: