8 BARRON’S October 26, 2020
rate target. In contrast, yields are moving
up, despite Fed Chairman Jerome Powell’s
insistence that the central bank “isn’t
thinking about thinking about” raising
its fed-funds rate until inflation averages
“moderately above” over 2%, a target that
it has persistently fallen short of.
But the bond market has been steadily
pricing in a significant rebound in infla-
tion, according to John Ryding and Con-
rad DeQuadros, economists for Brean
Capital. The spread between the 10-year
Treasury yield and the real yield on the
comparable maturity Treasury inflation-
protected securities, or TIPS, represents
the market’s inflation forecast for the next
decade. This has widened to 1.77%, which
they suggest means the market is, in ef-
fect, fighting the Fed.
The benchmark 10-year yield still has
yet to top its early June peak of 0.90%. Jim
Bianco of Bianco Research, who has been
looking for higher yields, opined in a web-
cast this past week that once it gets above
1% and especially if it hits 1.25%, people
will start to take notice. Similarly, David
Rosenberg, founder of Rosenberg Re-
search, notes that the 30-year bond’s yield,
at 1.65%, is closing in on resistance at
1.67%, also its June peak. He sees more
formidable resistance in the 1.95% to 2%
range. Such a rise might not be sustain-
able, he adds in a client note, but “may be
a warning salvo to other overly optimistic
markets, such as equities.”
U
ltralow interest rates have been
cited to justify the idea that no
price is too high to pay for
growth stocks, even if the earn-
ings payoff is in the distant future. But
equities haven’t been the only winners.
Homeowners, both prospective and
current, have benefited mightily from
record-low mortgage loan rates below 3%.
Low-cost credit has empowered buyers to
bid up prices of new and existing houses,
which are in tight supply during the
Covid-19-spurred exodus to the suburbs.
And homeowners who are sitting tight
have been able to pocket billions of dollars
by once again using their houses as ATMs
to pay for home improvements, autos,
boats, or other stuff to make being stuck
at home more enjoyable. As MacroMavens’
Stephanie Pomboy points out, they’ve been
able to refinance and take cash out at an
annual rate of $188 billion.
Freddie Mac reported that a 30-year
fixed-rate loan dropped to a record low of
2.8% (plus 0.6 points and fees) in the past
week, a dip of just one basis point, but 95
basis points below the level a year ago. In
dollar terms, that would trim the monthly
payment on a $300,000 loan to $1,
from $1,389. Alternatively, at the lower
rate, the homeowner could take out a
$338,000 loan with the same payment.
That cheap money has produced a hous-
ing boom the likes of which has not been
seen since the 2000s, albeit with an impor-
tant difference:During the housing bubble
back then, there was speculative building
of lots of houses and condos to flip. Now
there aren’t enough houses for buyers.
Existing-home sales have surged to the
highest level since May 2006, while
inventories of available homes have
dropped to 2.7 months of sales, down
from 3.0 months, the lowest since data
began to be compiled in 1959, notes Peter
Boockvar, chief investment officer of
Bleakley Investment Group.
Builders can’t put up new houses fast
enough. While housing starts were shy of
expectations in September, that shortfall
was all in multifamily units, while single-
family homes were up 8.5% in the month
and building permits pointed to continued
strength. Reflecting that robust outlook,
the National Association of Home Builders
sentiment index rose to a record high,
Boockvar also points out.
But is this as good as it gets? A sudden
downdraft in home builders’ stocks this
past week may suggest as much, writes
Julian Brigden, chief economist of Macro
Intelligence 2 Partners. Both theiShares
U.S. Home ConstructionETF (ITB), a
relatively pure play on builders, and the
S&P SPDR HomebuildersETF (XHB),
which has a lot of components that are re-
lated to housing, such as appliance maker
Whirlpool(WHR), fell even with a minor
recoupment of part of their losses on Friday.
Was the breakdown of the steep up-
trend in builders’ stocks a reaction to the
rise in bond yields? And, Brigden asks,
once the first wave of well-heeled urban-
ites has fled to the suburbs, will the next
tier qualify if mortgage credit tightens?
The plunge in bond yields has pushed
up asset prices from stocks to houses,
boosting household net worth to a record
in the second quarter. That rise, in turn,
tends to lead growth in the overall econ-
omy by about a half-year, according to
Evercore ISI, as the owners of these assets
spend some of their newfound wealth. All
to the good, but the revival of growth and
a liftoff in inflation won’t be as good for
fixed-income investors.B
email: [email protected]
Up & Down Wall Street Continued
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