When “Bond King” Bill Gross recently sat down with Barry Ritholtz to an episode of “The Big Picture” podcastthe billionaire investor and founder of PIMCO had a rather skeptical view of who could build a kingdom out of debt.
“I don’t think anyone can be the future king of bonds because central banks are basically the kings and queens of the market,” Gross said. “They govern, they determine where interest rates go,” he said.
The Federal Reserve now wants higher interest rates, potentially quickly, and tighter financial conditions as the US seeks to emerge from the pandemic, but with the highest cost of living in 40 years. Wages rose, but so did the prices of gasoline, groceries, cars, housing and more.
Fed March meeting minutes On Wednesday echoed the central bank’s tightening stance against inflation, including its outline of plans to reduce its balance of almost 9 billion dollars at your pace faster than ever.
Surprisingly, the act also left the door open for outright sales of central bank bonds. $2.7 billion holdings of mortgage-backed securities, a potentially disruptive process require other investors to fill the gap.
“Clearly, the Fed is very focused on bringing down inflation,” said Greg Handler, head of consumer and mortgage credit at Western Asset Management, noting that housing accounts for about one third of the owner consumer price index, a key indicator of inflation that reached an annual rate of 7.9% in February.
A new reading will be released on Tuesday, with Credit Suisse economists expecting March headline CPI to rise to 8.6%.
“It’s kind of their intention to throw a little cold water on the housing market,” Handler said, by phone. “Can you really see a correction or an overcorrection? I think there’s obviously some risk of that.”
What is too high?
Jerome Powell, Chairman of the Federal Reserve last summer he shrugged it off any direct link between its large-scale pandemic purchases of Treasuries and mortgages with rising home prices.
But the Federal Reserve has been a key buyer of that debt for years and, as Gross said during the podcast, the central bank has considerable influence over interest rates. Since the 2007-09 recession and subsequent foreclosure crisis, the government has been a vital cog in the approximately $12 trillion US real estate debt market.
Many Americans rely on financing to buy homes, with an eye to building generational wealth. Housing also remains a critical segment of the economy, meaning the stakes are high for what comes next.
“We’re taking note that a significant portion of household net worth is made up of home equity,” said Mike Reynolds, vice president of investment strategy at Glenmede, adding that baby boomers own a lot of assets. estate. estimated 142 million US Single-Family Home Stock
“It’s a part of the economy that has the potential for weakness going forward,” he told MarketWatch.
Low interest rates, and scarce inventory, led property prices to soar to new records during the pandemic, until 19% per annum in January. While some of the upward momentum of prices could relieve as 30-year fixed-rate mortgages suddenly approaching 5%, monthly mortgage bills, as a share of income, have already approached bubble-era levels.
Here’s a map showing the effects of price gains in the US from credit rating firm S&P Global, which now sees 88% of all regions as overvalued.
“Is a clear and imminent crash coming to the market?” Reynolds asked. “It seems unlikely just given the interplay between supply and demand.”
Strategists at BofA Global in early April said they expected a 10% home price appreciation this year and 5% in 2023, a call rooted in homebuilding in the post-2008 era.
Handler, a mortgage veteran, warned that “the range of forecasts has been the widest since the 2008 crisis.”
At the same time, parts of the “agency” mortgage bond market, where the Fed has been buying, have already repriced since the central bank began signaling a potentially faster drawdown of its balance sheet.
“Lower rate mortgages in the 2%-4% range have been under significant pressure to start the year, as the market had anticipated the Fed withdrawing support in the summer or second half of the year.” said the handler.
On the other hand, his team likes higher-coupon housing bonds, areas where the Fed has not been active, particularly because they benefit from rapidly rising home prices.
“Unfortunately for the Fed, the housing market is heating up,” Handler said. But in terms of the critically low supply of homes, “there’s not much the Fed can do right now.”
The Dow Jones Industrial Average
made a profit on Friday, but all three major stock market benchmarks
ended the week down 0.2% to 3.9% after Fed minutes reinforced expectations of tighter financial conditions ahead. The 10-year Treasury yield
it hit 2,713% on Friday, its highest level since March 5, 2019, according to Dow Jones Market Data.
Investors will hear from a series of Fed officials next week, beginning Monday with Chicago Fed President Charles Evans. But the big item in the usa economic calendar arrives on Tuesday with the March CPI reading, followed by jobless claims and retail sales on Thursday and industrial and manufacturing reports on Friday.