Equity markets surged after heavy selling of stocks on Monday even as bond yields rose and the 10-year Treasury touched above 1.450%. The “buy the dip” has proven to be a profitable strategy during this recovery, but, rising bond yields may limit gains. The Federal Reserve will soon begin to taper its asset purchases. For the interim, the Fed gave the all-clear on both asset purchases and on raising short term rates and risk-on assets such as equities responded favorably to the messaging from the Fed. However, the move up in bond yields should not be discounted. Interest rates are rising in all developed nations including the U.S.
Last night, Costco and Nike reported earnings, highlighting the impact of logistic, supply chain, and inventory challenges. All of these issues are inflationary and are proving not to be as temporary as the Fed has stated in the past.
How does this all affect housing? Higher bond yields plus inflation, if persistent, will slow down the housing market as homes are expensive nationwide. Potential buyers are justifying paying more by locking in historically low-interest rates. Inflation readings, which may move even higher over the coming months, could dent consumer and business sentiment. A lot will depend on how the Fed navigates monetary policy in the coming months. Major housing supply issues have provided high support levels for home prices. If rates move up to much this will affect the ability of homeowners to qualify for mortgages.
In summary, we see many headwinds to the ongoing economic expansion even as the equity market parties on. Caution remains warranted and for our borrowers, that means locking in interest rates at still very attractive levels.