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 It’s a Battle Between Stocks and Bonds!  Who Will prevail?

In these final weeks of Spring, I’d like to say congratulations to all the young graduates.  Graduation is a time we all remember, and I must say that it was great to see some resemblance of normalcy this year.  I also wanted to make one special shout out to Aiden Rodriguez, son of VP of Operations, William Rodriguez.  He is the first of the Smart Money kids to graduate from high school and we are all very proud of the fine young man he has become.  Continue to do great things, Aiden.  The aunties and uncles at Smart Money are cheering you on!

Now on to mortgage news.  In our last newsletter, we spoke about the relationship between the Fed Funds rate and mortgage rates.  I hope you all got something valuable out of that article.  Today, I’d like to discuss the relationship between stocks and bonds.  Specifically, how stocks affect mortgage rates. 

Imagine two buckets.  One bucket represents the Stock market and the other the Bond market.  Now imagine each bucket being filled with money, and this money represents the money invested in both stocks and bonds.  When someone sells a stock, the money comes out of the stock bucket and can do one of three things.  1) It can buy more stock and go back into the Stock bucket. 2) It can buy bonds and move to the Bond bucket.  3) Or it can buy neither and be removed from the market altogether.

I’m not going to get too detailed in order to keep this simple to understand.  Mortgages are a part of the Bond market.  Mortgage loans are bundled and sold as mortgage bonds to investors.  Investors buy bonds and receive a fixed rate of return on their money.  If investors are buying Stocks, then that means their money is not buying bonds and all the money is going into the Stock bucket.  When this happens the stock market increases in value.  This then forces the bond market to convince stock investors to come to their side and invest in their bucket.  The way bonds do this is to increase the interest rate the bond is paying to its investors.  The interest rate of return must be attractive enough for an investor to choose a bond investment over a stock investment.  If a mortgage bond must pay out more interest to investors, then the mortgages that make up these bonds must also have higher interest rates to support the bond payout.  For this reason, mortgage interest rates have been climbing higher in recent months.

You might now be thinking why didn’t mortgage rates go through the roof when the stock market was at all-time highs during the pandemic?  And why aren’t rates dropping now that stock values have been falling?  Both are great questions, and the answer is…..  The Feds!

During the pandemic, the Feds started a bond-buying program to prevent the economy from collapsing.  They learned from their mistakes in the last recession and quickly went into action to buy bonds and treasuries.  So, during the pandemic money from investors were filling up the Stock bucket and not the Bond bucket.  The Feds quickly decided to pump money into the Bond bucket to prevent mortgage rates from increasing and to keep the real estate market viable.  In fact, the Feds bought so many bonds and treasuries, about $6 trillion worth in two years, that they were able to artificially bring mortgage rates into the 2’s.  This is something we may never see again in our lifetime! 

The sad news is that every good thing must eventually come to an end and have its unintended consequences.  The Fed’s bond-buying program ended in May 2022.  This means the markets will have to naturally adjust to each other and we’ll start to see the more natural relationship between stocks and bonds mentioned earlier.  In a nutshell, rates are most likely going to continue to go up unless we come across another recession where the Feds intervene again.  Also, the consequence of the Feds printing more money to buy bonds and treasuries has pumped so much money into the system that we are now in a world of high inflation.  Inflation makes things we buy more expensive and makes mortgage rates go higher as well. 

This was a long article, so I thank you for hanging in there.  However, it is important to understand the relationships between the markets.  Our loan originators here at Smart Money are in tune with what the markets are doing, and we have made some great relationships over the years with our investors to give our clients the best rates and programs no matter what environment we are in.  We thank you for your support and hope to remain a valuable service to you and yours. 

Mahalo,

Daryn Ogino

Smart Money Hawaii - President, NMLS #278557

 

 

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