One week after home loan rates failed to improve further in the face of multiple bond-friendly stories, such as low inflation, high unemployment claims, and the Fed’s continued commitment to purchase bonds, we watched home loan rates tick up this past week.

Why?

Oversupply. The U.S. Treasury announced they will need to borrow $3 trillion through the third quarter of 2020 to pay for the economic stimulus package related to the coronavirus. In order to “borrow” the $3 trillion, the Treasury will issue a new 20-year bond that will need to be purchased by investors.

Investors, at the moment, are showing early signs that rates will need to tick higher to meet the buying demand for this enormous new supply of bonds. Early in the week, the 10-year yield hovered near .60% but ticked higher to .73% during the week and this weighed on mortgage-backed securities, which home loan rates are derived from.

On Friday, the Bureau of Labor Statistics reported that 20,500,000 were unemployed in April, lifting the unemployment rate to 14.7%. It was the worst Jobs Report in the history of the U.S.

Home loan rates didn’t improve in response to the horrible “oversupply” of unemployed shown in the Jobs Report. This is because the markets are forward-looking, and April’s Jobs Report is backward-looking.

Bottom line: The bond market is more focused on the additional supply of bonds that will need to be purchased and the cautious optimism seen in reopening parts of the U.S. economy. For this reason, consumers who have an opportunity to lock home loans at current all-time low rates would be wise to do so.

A Look Ahead
The upcoming week will continue along the same lines, as headlines from the pandemic-induced economic fallout will continue to stream in.

The bond markets will be up against a huge batch of increased added supply from the Treasury that investors will have to sop up. The Treasury will sell $96 billion in Treasury securities this week, up from $84 billion from a recent similar offering.

A key report this week will measure how the consumer has been holding up during the shutdown. Retail Sales for April will be released this upcoming Friday after the near 9% decline seen in March, which was the worst on record in the data available from the Census Bureau, which dates back to 1992.

The markets will be closely watching if unemployment declines and if coronavirus cases decline as well. If they do during the next couple of weeks, the recent uptick in optimism will be justified.

Another set of data to be watched this week will be the NFIB Small Business Optimism Index for April to gauge the depth of the virus outbreak on the small business sector of the economy, which accounts for 44% of U.S. economic activity. In addition, the JOLTS (Job Openings and Labor Turnover Survey) report will be released for March, which is another set of numbers to measure job openings.

Reports to Watch:

  • The inflation reading Consumer Price Index will be released on Tuesday followed by the Producer Price Index on Wednesday.
  • The closely watched Weekly Initial Jobless Claims report comes on Thursday.
  • Retail Sales, Empire State Manufacturing, and Consumer Sentiment will be delivered on Friday.

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