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In case you’re just catching up or haven’t otherwise heard, the biggest news in the financial markets since last Friday has been the initial failure of Silicon Valley Bank. While not necessarily a household name, SVB was the 16th largest bank in terms of assets and the second largest bank failure in history behind Washington Mutual 15 years earlier.
Combine this with the fact that the third largest bank failure in history (Signature Bank) occurred 2 days later and it is no surprise that concerns about systemic risk (aka, the domino effect resulting in additional turmoil) There is some jitters in the financial markets.
Panic in the financial markets is generally good for US Treasury interest rates, almost always much better than mortgage rates. This episode has been no exception. The US Treasury coupon that markets often use as a benchmark for mortgage rates fell almost twice as much as mortgage rates on Friday, but the gap is starting to tighten a bit.
The past two days each saw the average lender move savvy about 0.2%, but it should be noted that there is a wide disparity between lenders and loan programs. Besides, times keep changing. Some lenders corrected higher on Friday and lower today. We can only comment on the average and thus this is the second biggest 2-day fall in rates since March 2020.
Speaking of big things, the big question is “What’s next?”
Really! Right now there are more questions than answers. Some say the bank failure is evidence that “something is broken” in the Fed’s tough interest rate policies, and that they should now scale back their intensity.
Others say the Fed knew some things would “break” and they only dialed back when low inflation says they can.
To this, others say that inflation is likely to go down further as people are worried about the banking system and recession.
And to that I say we don’t know yet. We only know that these bank failures are very different from the failures seen before the financial crisis in several important ways. We also know that the Fed/FDIC/Treasury stepped in with a non-taxpayer-funded plan to calm the market, and it appears to be working generally today.
If the market is calm, why are rates still so low? This has to do with the market changing its expectations for Fed rate hikes through the rest of 2023. Notably, the market now sees the Fed hitting the ceiling rate less than 1.5% earlier last week!
If this situation continues in the coming days, then the mortgage rates may fall further. We’ll learn more about those constraints at two critical moments: tomorrow at 8:30 a.m. Eastern Time when we get the next key inflation report, and again next Wednesday afternoon when the Fed issues its latest policy announcement.
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