Oct 08, 2023, 2:00 am EDT
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Higher mortgage rates are likely to drive home sales back to a 13-year low as more buyers put their searches on hold—but they aren’t scaring everybody away.
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U.S. companies binged on debt when rates were super low, so they wouldn’t have to swallow the bitter pill of higher borrowing costs down the road.
The strategy has worked out well for most companies in 2023 as the Federal Reserve has quickly jacked up its policy rate to its highest level in 22 years.
Still, an “iceberg” could await corporations if the Fed keep rates higher for longer. Fears of that precise backdrop next year helped send the benchmark rate for the U.S. economy to its highest level since the fall of 2007, with the 10-year Treasury yield
BX:TMUBMUSD10Y
around 4.57% on Friday.
“The lagged effect of higher rates has been very pronounced in this tightening episode, since only a small share of corporate debt has been reset so far,” Oleg Melentyev’s credit strategy team at BofA Global said in a Friday client note. “All this tells us that what we observed so far is just the tip of an iceberg.”
Despite all the Fed already has done to fight inflation, many companies still benefit from ultra low pandemic rates, with only about 10% of the roughly $1.5 trillion U.S. junk bond market having seen rates reset this year, according to BofA Global.
Their data suggests roughly 10% of the high-yield, or “junk bond,” market has seen actual rate resets, below the 14% estimate for investment-grade corporate bonds, and about 13% for the leveraged loan market over the past year.
Read: A wrecking ball could hit leveraged loans if the Fed keeps rates high
“Not only those resets have been slow, but there was also a material quality skew in those who have chosen to reset: issuers with stronger fundamentals,” the BofA Global team wrote.
High-yield bonds have been a bright spot in the roughly $55 trillion U.S. bond market this year, where a jump in long-term yields since July has put the popular iShares 20+ Year Treasury Bond ETF
TLT
down almost 11% on the year so far and the iShares Core U.S. Aggregate Bond ET
AGG
down 3% in 2023, according to FactSet.
High-yield total returns were pegged at almost 6% on the year by Goldman Sachs researchers, versus close to -3.4% for 10-year Treasurys and the S&P 500’s
SPX
11.7% advance.
Despite the recent bond-market carnage, the two big U.S. junk-bond ETFs were positive on the year through Friday, with the iShares iBoxx $ High Yield Corporate Bond ETF
HYG
up 0.2% through Friday and the SPDR Bloomberg High Yield Bond ETF
JNK
0.4% higher, according to FactSet.
While yields are higher across the bond market, credit spreads aren’t. Tight credit spreads signal that bond investors aren’t yet too worried about the odds of hard landing for the U.S. economy or a deeply painful default cycle in this cycle. Rate cuts would also improve the outlook for borrowers with a wall of debt maturing in the next few years.
Ryan Ratliff (L), Real Estate Sales Associate with Re/Max Advance Realty, shows Ryan Paredes (R) and Ariadna Paredes a home for sale on April 20, 2023 in Cutler Bay, Florida.
Joe Raedle | Getty Images News | Getty Images
Mortgage interest rates just hit a level not seen since the year 2000. As a result, mortgage demand is now sitting near a 27-year low.
Total mortgage application volume fell 1.3% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was 25.5% lower than the same week one year ago.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 7.41%, from 7.31%, with points decreasing to 0.71 from 0.72 (including the origination fee) for loans with a 20% down payment. The rate was 6.52% one year ago.
The 30-year fixed jumbo mortgage rate increased to 7.34%, the highest rate in the history of the MBA’s jumbo rate series dating back to 2011.
“Based on the FOMC’s most recent projections, rates are expected to be higher for longer, which drove the increase in Treasury yields,” said Joel Kan, an MBA economist, referencing the Federal Open Market Committee. “Overall applications declined, as both prospective homebuyers and homeowners continue to feel the impact of these elevated rates.”
Applications to refinance a home loan fell 1% for the week and were 21% lower than they were one year ago. After record low interest rates throughout the first few years of the pandemic, and a refinance boom, there are precious few borrowers now with mortgage rates high enough to benefit from a refinance.
Applications for a mortgage to purchase a home fell 2% for the week and were 27% lower than the same week year over year.
Today’s potential buyers are facing an unprecedented dynamic of a historically low supply of homes for sale, coupled with both rising interest rates and rising prices. Higher interest rates historically throw cold water on home prices, but the supply and demand imbalance is so severe that it is pushing prices higher even though more and more buyers are unable to afford a home.
Interest rates continued to move higher this week, according to a separate survey from Mortgage News Daily. Even sales of newly built homes, which had been rising due to the short supply on the resale market, took a hit in August, according to another report this week. Sales dropped nearly 9% in August from July’s pace, hitting the lowest level since March.
Who says higher interest rates are bad for S&P 500 stocks? A select group is thriving even as the Federal Reserve hikes rates.
X
Seven S&P 500 stocks — including First Solar (FSLR), Constellation Energy (CEG) and Eli Lilly (LLY) — jumped 90% or more since the Fed first jacked up interest rates in this latest push starting in March 2022, says an Investor’s Business Daily analysis of data from S&P Global Market Intelligence, MarketSmith and Bankrate.com.
Talk about outperformers. These stocks rose an average of 104% since the Fed started raising rates. That blows away the S&P 500’s 3.5% rise in that time.
What’s more, they’re all showing strength as the market worries that more rates increases are coming. The seven S&P 500 stocks are up an average of 52% just this year, easily topping the S&P 500’s 12.9% rise.
“Projections indicate one more rate hike by the end of the year, consistent with the previous message from June,” said Ned Davis Research’s Joseph Kalish.
Investors are enduring one of the steepest periods of rising short-term interest rates in U.S. history. But savvy stock pickers are still finding big gains.
The Fed jacked up interest rates 11 times since March 2022, says Bankrate.com. That’s taken short-term rates from a target of 0.25%-0.50% up to 5.25%-5.50%. Rising rates have taken a toll on borrowers suddenly facing higher costs to borrow.
As a result, the S&P 500 is underperforming what it normally does in that time period. But there are exceptions. Big ones.
If higher interest rates are a headwind for S&P 500 stocks, that doesn’t seem to apply to First Solar.
Shares of the maker of alternative energy products are up nearly 132% since the Fed started hiking rates. That makes it the top S&P 500 during the Fed’s hikes. And the rally makes total sense. In some ways, solar power is a beneficiary of price inflation in traditional energy sources. Higher oil prices make solar more competitive. Additionally, massive government incentives encourage green energy.
The result is explosive profit growth. Analysts think the company will earn an adjusted $7.91 a share this year. That’s up from a loss of $2.79 a share in 2022.
Similarly, green-minded Constellation Energy is a big winner, too. Shares of the Baltimore-based utility are up 116% since the Fed started boosting rates. The company says that 90% of the power it generated in 2022 was carbon free.
And analysts think the efforts will start paying off. Profit in 2024 is expected to rise more than 25%. That’s well above Constellation’s expected 15% profit jump in 2023.
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It’s not just S&P 500 companies exposed to green energy that are thriving despite higher interest rates.
Breakthrough treatments for neurological and other conditions turned Eli Lilly into a dynamo despite the Fed. Shares are up 104% since the hikes started. Profits are rising rapidly, too.
Marathon Petroleum (MPC) is up more than 102% as the company benefits from energy inflation. Ironically, the higher interest rates are partially in response to such inflation. And don’t forget the AI revolution, which hit a fever pitch as the Fed raised rates. AI king Nvidia (NVDA) has seen shares gain 93% since the first rate hike.
It’s anyone’s guess when the Fed will stop raising rates. Ned Davis’ Kalish thinks one more is on the way soon. “Dot plot shows one more rate hike this year and fewer rate cuts next year. December would be more likely than November in our view.”
But some S&P 500 investors found ways to make money no matter what the Fed does.
Starting from March 2022 hike
| Company | Ticker | % chg since hikes | Sector |
|---|---|---|---|
| First Solar | (FSLR) | 130.9% | Information Technology |
| Constellation Energy | (CEG) | 115.8 | Utilities |
| Eli Lilly | (LLY) | 104.5 | Health Care |
| Marathon Petroleum | (MPC) | 101.9 | Energy |
| Nvidia | (NVDA) | 92.3 | Information Technology |
| Lamb Weston | (LW) | 91.6 | Consumer Staples |
| Fair Isaac | (FICO) | 90.9 | Information Technology |
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Exchange-traded funds that invest in long-term Treasury bonds dropped Thursday, as yields continued their march higher in the wake of the Federal Reserve’s meeting on monetary policy.
Shares of the Vanguard Long-Term Treasury ETF VGLT finished with a sharp 2.3% drop, while the iShares 20+ Year Treasury Bond ETF TLT sank 2.6%, according to FactSet data. The iShares 10-20 Year Treasury Bond ETF TLH slumped 1.9%.
Ten-year…
The Federal Reserve’s announcement on interest rates was no surprise today—but it provided a set of clues we only receive from the Fed once per quarter, suggesting where savings and CD rates could be headed for the rest of this year and into 2024. For CD shoppers trying to decide when to lock in a great rate and what certificate duration to choose, any possible signals from the Fed are worth pondering. So let’s see what we learned.
What the Federal Reserve does with the federal funds rate has a direct impact on the interest banks and credit unions are willing to pay for savings, money market, and certificate of deposit (CD) accounts. So when the fed funds rate goes up, bank rates go up as well. The same is true when the Fed lowers its benchmark rate.
Today’s move by the Federal Reserve was actually a non-move. As was widely expected, the central bank held the fed funds rate steady, after most recently raising it on July 26. Across the last 13 meetings—beginning in March 2022—the Fed has raised its benchmark rate 11 times. That’s resulted in a cumulative increase of 5.25% so far, and has taken the Fed rate to its highest level since 2001.
But once every three months, the Fed’s rate-setting committee releases some extra “behind the curtain” information, including the eagerly anticipated “dot plot”. This chart represents each committee member with a dot (with no names attached) and uses those dots to show where each member believes the fed funds rate will be at the end of 2023, 2024, and so on.
In the dot plot released today, we learned that almost two-thirds of the Fed members (12 out of 19) believe the benchmark rate will need to be raised one more time in 2023, for another increase of 0.25%. All of the remaining seven members instead believe the rate will hold where it is through the rest of the year.
If the majority proves right, it would mean another rate increase on either Nov. 1 or Dec. 13. And this in turn could nudge CD rates a bit higher. It’s also true that if an increase becomes widely expected, some banks and credit unions could raise rates ahead of the actual Fed announcement.
But beware: These are just predictions, based on what the Fed members know right now. The economic landscape can change quickly, which means the Fed can change course from previous projections.
What we can gather from the dot plot about the direction of rates in 2024 is a little fuzzier, given the more distant time horizon. The biggest point of agreement among Fed members is that there will be rate cuts in 2024. Roughly 70% of the committee members (13 out of 19) believe the fed funds rate will be lowered by the end of 2024. However, the amount of decline they project varies between 0.25% and 1.00%. The median expectation is a drop of 0.50% in 2024.
The other reason this projection is a little less concrete than 2023’s forecast is that the dot plot doesn’t convey any timing of rate changes other than the calendar year. So while it seems likely that one or more rate decreases will be implemented in 2024, the dot plot provides no information on which of next year’s eight meetings we should expect the cuts.
What this means for CD shoppers is that you’ll perhaps have a fair bit of time during which rates will stabilize and you can choose when to make your CD-buying move. But as soon as it appears likely a Fed rate decrease is on the horizon, rates will begin to soften, and mostly likely in advance of an actual Fed decrease.
With rates at record highs already, CD shoppers are sitting in a good spot. While it’s true that CD rates could edge a little higher, they are not expected to rise by much, tacking on perhaps another quarter point when they have already risen more than five percentage points. That means what you stand to gain by trying to time the perfect CD peak is minimal—and may not be worth the gamble of potentially losing out if rates decline before you expect it.
The smartest advice is to decide carefully what your ideal duration is, and then shop around to choose the best CD in that term. Right now, the top offers in our daily ranking of the best CD rates pay as much as 5.80% APY, with 20 CDs paying at least 5.65% APY. So you have an abundance of options at your disposal.
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account’s minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don’t meet other eligibility criteria (e.g., you don’t live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.
High mortgage rates make it difficult for prospective homebuyers to enter the market.
Mortgage rates could decline if the Federal Reserve cuts interest rates next year.
Here are nine projections from experts on when the Fed’s first rate cut will come.
High mortgage rates have effectively frozen the US housing market. And while lower rates could be on the horizon, Americans might have to wait awhile.
The average rate for a 30-year fixed-rate mortgage is over 7%, up from roughly 3% at the beginning of 2022. This has deterred prospective first-time homebuyers from taking the plunge and made existing homeowners reluctant to sell their homes and buy another — they’d rather stick with the superlow rates they already locked in.
Meanwhile, the lack of people selling their homes has contributed to a shortage of housing inventory and helped prop up prices, which may not drop anytime soon. While these factors serve as deterrents for prospective buyers, interest rates may not stay this high forever.
The Federal Reserve has raised interest rates to combat inflation, but many experts predict it will move more cautiously — and perhaps even cut rates — over the next 12 to 18 months, in response to slowing inflation and the prospect of a weakening US economy.
While declining interest rates wouldn’t directly cause mortgage rates to fall, the two tend to move in the same direction. That’s why prospective homebuyers would be wise to keep tabs on when the Federal Reserve’s first interest-rate cut might come — even though rates are unlikely to return to what they were a few years ago.
Insider compiled nine recent expert predictions for when the first rate cut would come. The predictions are listed chronologically — experts who expect a rate cut to come soonest are listed first.
In an interview Tuesday with Bloomberg Television, Bob Michele, J.P. Morgan Asset Management’s chief investment manager, said the Fed could pivot — perhaps before the year ends — and start cutting interest rates.
“They’re going to tell us that they’re going to keep rates higher for longer until inflation is at their target,” he said. “But the magnitude of the slowdown we’re seeing across the board tells us that we’ll probably still be hitting recession around year-end, so they’ll be cutting rates by then.”
On August 31, Preston Caldwell, a Morningstar senior US economist, wrote in a note that he expected the Fed to start cutting interest rates in February.
“The Fed will pivot to monetary easing as inflation falls back to its 2% target and the need to shore up economic growth becomes a top concern,” he wrote.
Last month, David Einhorn, the founder and president of the hedge fund Greenlight Capital, wrote that he didn’t expect the Fed to cut interest rates until next year.
“We continue to believe that the market is over-anticipating rate cuts and we have extended that view through March of 2024,” he said.
Following the release of August’s inflation report, KPMG US’s chief economist, Diane Swonk, wrote in a note that the Federal Reserve might not be done raising interest rates.
“The Fed needs to see quarters, not months, of fundamentally cooler inflation to cut rates. We are not even close,” she wrote. “Our forecast for the first rate cut in May 2024 holds.”
Separately, according to CME Group’s FedWatch tool, which calculates the odds of different Fed interest-rate moves based on what traders are doing in derivatives markets linked to those rates, there’s a 19% chance of a rate cut in March. In May, the odds jump to 82.3%.
In a Reuters poll of 97 economists between September 7 and Tuesday, the consensus prediction was that the Fed wouldn’t cut interest rates until the April to June period.
“Tight labor and housing markets present upside risk to inflation,” Andrew Hollenhorst, the chief US economist at Citi, told Reuters. “That means that absent a recession, policymakers are likely to keep policy rates on hold well into 2024.”
In a September 7 “Goldman Sachs Exchanges” podcast episode, Goldman Sachs’ chief US economist, David Mericle, said he projected the Fed’s first interest-rate cut to be in the second quarter of 2024.
“And so the best guess is that we’ll get back to 2%,” he said, regarding inflation. “But by no means are we definitively there or even close enough. So too soon to say that we’ve beaten this problem.”
On Monday, economists from some of North America’s biggest banks said they expected the Fed to hold off on cutting rates until sometime between May and the end of next year.
“Given both demonstrated and anticipated progress on inflation, the majority of the committee members believe that the Fed’s tightening cycle has run its course,” Simona Mocuta, the chief economist of State Street Global Advisors, said.
In a Thursday note, Vanguard’s global economics and markets team wrote that it didn’t expect the Fed to start cutting interest rates until the second half of 2024.
“We believe the catalyst for easing would be either a recession or inflation falling while economic activity remains strong (a ‘soft landing’),” the team said.
Jeff Morton, a portfolio manager at DWS Group, said that interest-rate cuts were unlikely to come until next year.
“We have pushed back our cut forecast to later next year, at the pace of one cut per quarter barring any severe recession,” he said.
Read the original article on Business Insider
Gold futures settled lower on Thursday for a third session in a row as investors looked to recent economic data and a busy calendar of speeches by Federal Reserve officials for cues on the path for U.S. interest rates.
“Gold prices remained under pressure and could continue to see a decline as traders take U.S. economic data into account, as well as the changing expectations around U.S. monetary policy,” said Bas Kooijman, chief executive officer at DHF Capital, in emailed commentary.
…
Bonds will do well if U.S. interest rates decline in coming months. What you may not appreciate is that dividend-paying stocks are likely to do even better.
That’s because dividend payers possess a powerful combination of both bond-like characteristics and equity-like growth potential. Like bonds, dividend-paying stocks benefit from declining interest rates. Unlike bonds, those dividend-yielding stocks also benefit from lower interest rates because they cause the discounted value of their future earnings to increase.
“ During declining-rate months, dividend stocks on average did more than twice as well as 10-year Treasurys. ”
To document this double-barreled benefit, I segregated all months since 1927 into two groups: Those in which the 10-year Treasury
BX:TMUBMUSD10Y
rate (or equivalent) declined from the previous month, and those in which the rate rose. On average in the declining-rate months, a portfolio containing the 10% of stocks with the highest yields rose at an annualized rate of 22.7%. During the rising-rate months, in contrast, this portfolio gained just 5.0%. (These returns are courtesy of a database from Dartmouth College professor Ken French.)
The comparable returns for 10-year Treasurys, in contrast, are 9.4% and 0.4%, respectively. (These bond returns are courtesy of a database maintained by Yale University professor Robert Shiller.) So during declining-rate months, dividend stocks on average did more than twice as well as 10-year Treasurys.
To be sure, a portfolio of 10-year Treasurys will have lower volatility than a portfolio of high-yielding stocks, even when interest rates are declining. So the extra return that those stocks produce above and beyond bonds during declining-rate environments is not totally a free lunch. But what is clear is that dividend payers are a better bet when interest rates are falling than when they’re rising.
The key to dividend stocks’ bond-like quality is that their dividends aren’t slashed when interest rates decline. That’s not always the case with lower-quality stocks, whose high yields often indicate an imminent dividend cut. But financially sound blue-chip companies are loathe to cut their dividends, often going to great lengths — including going into debt — to avoid doing so.
For that reason, it’s important to take financial quality into account when choosing dividend-paying stocks. With that thought in mind, I mined the database of stocks that are recommended by at least two of the top-performing newsletters that my performance auditing firm monitors. Below are the 20 stocks in that database with the highest recent dividend yields, listed in descending order of their yields. (Data courtesy of FactSet.)
| Stock | Dividend yield |
| TC Energy Corp (TRP) | 7.9% |
| Keycorp New (KEY) | 7.7% |
| Kohls Corp (KSS) | 7.3% |
| Columbia Bkg Sys Inc (COLB) | 7.3% |
| Truist Finl Corp (TFC) | 7.0% |
| Walgreens Boots Alliance (WBA) | 6.7% |
| Bank N S Halifax (BNS) | 6.7% |
| Leggett & Platt Inc (LEG) | 6.5% |
| Simon Ppty Group Inc New (SPG) | 6.4% |
| Foot Locker Inc (FL) | 6.3% |
| Crown Castle Inc (CCI) | 6.1% |
| Citizens Finl Group Inc (CFG) | 5.9% |
| Comerica Inc (CMA) | 5.9% |
| 3M Co (MMM) | 5.9% |
| International Paper Co (IP) | 5.4% |
| Prudential Finl Inc (PRU) | 5.4% |
| Dow Inc (DOW) | 5.2% |
| Fifth Third Bancorp (FITB) | 5.1% |
| PNC Finl Svcs Group Inc (PNC) | 5.0% |
| Suncor Energy Inc New (SU) | 5.0% |
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: Now’s the time to own dividend-paying stocks. These 5 offer up to a 9% yield.
Plus: These 20 dividend stocks have been the best income growers in the S&P 500
The robust growth of the U.S. economy may necessitate additional interest rate increases to mitigate inflationary pressures, according to Federal Reserve Chair Jerome Powell.
Speaking at the Jackson Hole Economic Symposium, an annual conference of central bankers in Jackson Hole, Wyo., Powell outlined the uncertainties surrounding the economic outlook while indicating the possible need for further restrictive monetary policies, as reported by the Associated Press.
Despite inflation having declined from its peak, Powell maintained that it remains excessively high. He further emphasized that the Federal Reserve remains watchful for signs that the economy is not decelerating as predicted. The central bank is poised to escalate rates further, if necessary, and plans to maintain a restrictive policy level until it sees substantial evidence of sustained inflation reduction towards their 2% target.
As Powell noted, the economy has been expanding at an unexpected pace, coupled with consistent consumer spending, potentially sustaining high inflation pressures. This observation marks a significant departure from his statements in the previous year, where he explicitly warned of continued sharp rate hikes by the Fed to curb soaring prices.
The Fed’s rate hikes have resulted in significantly increased loan rates, making it challenging for Americans to afford homes or cars and for businesses to finance expansions. Despite this—and contrary projections—the U.S. unemployment rate remained steady at 3.5%, barely above a half-century low. The persistent inflation and robust employment figures underscore Powell’s concern about the rapid economic growth, indicating a potential need for higher interest rates to act as a restriction.
Contrary to expectations earlier in the year, most traders now foresee no interest rate cuts before mid-2024 at the earliest. According to Powell, the central bank’s policymakers believe their key rate is sufficiently high to restrain the economy and cool growth, hiring, and inflation. However, he acknowledged the difficulty in determining the necessary borrowing costs to slow the economy, resulting in constant uncertainty regarding the effectiveness of the Fed’s policies in reducing inflation.
While traders and economists have shown increased optimism for a “soft landing”—the Fed achieving its target inflation rate without inducing a steep recession—others remain skeptical.