Interest Rate Update: Mortgages, Junk Bonds Reach Lows

Interest rates for home loans, junk bonds, and several other financial products have fallen while the Federal Reserve hints at expanding the monetary base further.  Even as several economic indicators show a slight resurgence, mortgages declined alongside Treasuries due, in part, to a slump in home buying.

Interest rates for home loans, junk bonds, and several other financial products have fallen while the Federal Reserve hints at expanding the monetary base further.  Even as several economic indicators show a slight resurgence, mortgages declined alongside Treasuries due, in part, to a slump in home buying.

Some analysts call the soft activity a short-term blip, while others say it indicates the declining real purchasing power of middle class Americans in the housing market, as property values rise by over 5% nationwide and significantly higher in high-cost areas, such as coastal cities, where demand from foreign buyers remains very high.

Mortgages fell to 3.58% for a 30-year fixed-rate mortgage last week, a basis point decline from the prior week, while a .02-point fall in 15-year fixed-rate mortgages brought that rate down to 2.86%. According to a new survey by Freddie Mac, rates were down 2.4% on a year-over-year basis for 30-year mortgages, which fails to offset a more than 5% increase in housing prices on a year over year basis.

Junk Bond Demand

Mortgage rates are falling due to weak demand for homes, as banks compete more aggressively to court tapped-out Americans. Meanwhile, junk bond yields are falling due to high demand for high yield credit, as the price of bonds rises in open market auctions.

According to the Bank of America Merrill Lynch U.S. High Yield Master II Effective Yield benchmark, junk bonds were yielding an average 7.92% last week, down significantly from the 10% high reached in February 2016. That decline is largely due to a re-emergence of capital in the high yield market. At the end of February, junk bonds saw a $5 billion inflow as investors looked for value in the market.

Analysts say more value is in the high yield market, despite the recent run-up in bond prices. In a recent report, investment firm Guggenheim Investments said that high yield bonds continue to offer risk-adjusted value thanks, in part, to the Federal Reserve’s decision to postpone further interest rate hikes.

“While spreads have since narrowed, we are still finding bargains in high-yield bonds and bank loans, but we remain mindful of the potential for another bout of market volatility,” said Scott Minerd, Guggenheim Chief Investment Officer. “Fundamentally, both markets are performing well. Bank loan borrowers, in particular, may benefit from the Federal Reserve’s decision to delay raising interest rates, keeping borrowing costs at historically low levels,” he added.

The Federal Reserve has recently hinted that rate hikes may not appear for a while. Chicago Fed President, Charles Evans, said he expects “a moderate increase” in the Fed’s policy because of growing economic risks. That will leave more time for the Fed to wait on raising interest rates.