Hold onto your hats because what I’m about to tell you will blow you away! No, this isn’t one of those things that are too good to be true, though it may seem unbelievable. Mortgage rates are at an astronomical all time low in spite of decades-high inflation!

Did you know that inflation is an absolute enemy of interest rates? Let me tell you why this is the case:

  1. The dollar amount an investor can afford to pay for a bond/loan will determine the rate itself. This is because they provide a good portion of cash and you make interest payments over a duration of time.
  2. Inflation = increased prices
  3. *On a positive note: stream value of monthly payment never increases because that number was agreed on
  4. Monthly payment itself loses value over a period of time
  5. If investor notices inflation rising, the rates may be enlarged in order to profit

 

What’s up with the paradoxical reaction? 

This has occurred as a domino effect from something called a “short squeeze” (when traders bet on higher rates). The bets are made when bonds are made shorter. This entails something being sold at today’s current prices and down the line, buying it back for a better deal. It’s important to remember that prices and rates have an inverse relationship; as prices are lessened, rates increase. 

When prices increase instead of decrease, traders typically buy out bonds to avoid a future loss. By doing this, the prices are actually being driven higher and rates are lowered. 

Why were so many traders betting on higher rates?

For example, think about what’s currently occurring in today’s society. COVID numbers are continuing to drop and the economy is slowly starting to reopen and get back on its feet. The Fed has considered narrowing its bond purchases. With that being said, if we examine economic fundamentals, it is more likely that there will be rising rates vs falling rates.

 

Does that mean rates will continue to fall for the next few months?

The answer is up in the air. We simply do not know. Rates have the ability to move both higher and lower. Rates will probably not drop significantly lower unless there is another sudden shock in the economy. This is also the case in regard to an increasing rate. It will most likely not raise significantly higher until we know for sure that the economy is sustainable as a whole and back in business. When this is the case, that’s when we’ll be aware of the Fed indicating that they’re tapering bond purchases.

The following charts highlights 10 year Treasury yields (longer-term interest rates) and Core Consumer Prices (most popular measure of consumer-level inflation):