Why are Interest Rates Going Back Up?

The 10-year Treasury yield is up 0.6%  from the year-to-date lows seen just prior to the 0.5% Fed cut on September 16. The widespread view is that the spike in rates is due to a combination of:

·       repricing the Fed’s rate cut path and

·       the rising risk of a post-election inflation shock as Trump’s election odds have increased (Trump era tariffs + a reversal of immigration flows).

Although the rise in yields does correspond to Trump’s rise in the online betting markets, a good chunk of the move has been driven by a re-pricing of the Fed’s rate-cutting path, after the strong September NFP report and a steady rise in GDP tracking estimates for Q3.

In addition, headlines from the likes of Druckenmiller, Paul Tudor Jones, and T. Rowe Price have rattled the bond market over fears of spiraling deficits and an ensuing inflation panic. T. Rowe Price predicts a 5% 10-yr yield, triggered by big deficits and accompanying inflation.

 The chart below shows the MOVE index.  This measures volatility in rates; like the way the VIX measures volatility in the stock markets.  As you can see, recently, we have had a big increase in rate volatility.  This could be attributed to election uncertainty. 

This next chart shows the impact of Trump election prospects on market activity.

Leading up to the highly anticipated first rate cut, mortgage rates dropped.  You probably noticed an increase in home refinance advertisements during this time.  However, since the Fed cut rates, mortgage rates have drifted higher again.  The 30-year rate is back to almost 7% at this point. 

As of the time of this writing, the S&P 500 is slightly negative for the week.  This comes on the heels of the big tech companies reporting their third quarter earnings and on the eve of the election.  Will stock and bond market anxiety ease after the election?  There is a good chance that it will – markets do not like uncertainty.  Hopefully by this time next week, we will know who the president will be, and which party will control the Senate and House.