Housing Weakens as Borrowing Costs Stay Elevated
Key Questions
Why does the Fed have limited control over the long end of the yield curve?
The Fed controls short rates, but long rates are driven by term premium, issuance composition, and foreign demand. This explains elevated long yields despite steady short rates.
What does the steep yield curve indicate about market expectations?
The 45bp spread above the policy rate shows markets pricing a higher terminal rate. Real yields are leading the move rather than inflation premium or fiscal fears.
How are rising Treasury yields affecting Fed hike odds?
Yields have pushed hike odds to 38% ahead of the FOMC decision, with the 2-year yield exceeding the Fed ceiling. Bond traders now see over a one-in-three chance of a hike.
What role does the US budget deficit play in yield movements?
Mounting deficits add structural pressure pushing yields higher and complicate the Fed's rate decisions. This factor operates beyond immediate inflation or growth signals.
Have breakeven rates risen with recent oil price spikes?
Breakevens have not risen alongside oil prices, suggesting markets expect the Fed to act. Term premium remains contained, pointing to growth and inflation expectations as drivers.
How do foreign demand and issuance affect long-term yields?
Foreign demand and the composition of Treasury issuance influence long rates independently of Fed policy. These elements limit the central bank's ability to steer the entire curve.
What signals are bond traders watching for the Fed's next move?
Traders focus on the 2-year yield at 4.25% and decreasing 'Pause-Pause-Pause' odds. This reflects growing expectations of a possible hike despite economist consensus.
Why might long yields stay elevated even if the Fed holds rates?
Structural constraints like term premium and issuance keep long yields high regardless of short-rate policy. This highlights the Fed's limited influence over the full curve.
October homebuilder confidence was reported at 29, its lowest since June 2012, with mortgage rates at 7.40%, weaker buyer traffic, and increased builder incentives. A repeated report gives September housing starts down 5.2%, single-family starts down 4.6%, and permits steadier; treat housing as an indirect policy signal.