The decline in 10-year Treasury yields and mortgage rates is just another rally in the bear market. The longer uptrend in yields is intact, with higher highs and higher lows

“Nothing goes wrong in a straight line.” This is how functional markets adapt to a new reality: higher inflation, rates.

By Wolf Richter for WOLF STREET.

There was a lot of talk and hesitation and the Fed kingpin fantasized about the 10-year Treasury yield falling from 4.25% at the end of October to 3.51% at the close on Friday. That’s a drop of 74 basis points. As a percentage, the return fell 17%. A decline in yield means a rise in the prices of these securities. This fall in yields therefore represents a rally in prices.

But here’s the thing: During the summer bear rally, the 10-year yield fell 25%, from 3.49% to 2.60%. Prior to that, there had been a few small bearish rallies. But the biggest bear market rally during this bond bear market was from April 2021 to August 2021, when the yield fell 30% from 1.70% to 1.19%.

The 10-year yield closed at 0.52% on August 4, 2020, marking the end of the 39-year bond bull market. Since then, the 10-year yield has risen sharply, with big breakouts followed by small retracements, followed by big breakouts, followed by small retracements, and so on. “The 10-year yield, as it rose, marked higher highs and higher lows each time. And the current bear market rally fits in nicely, and their yield could go down further, and it would still fit in nicely:

In August 2020, the 10-year yield hit a low of 0.52% – after months of widespread propaganda by bond and hedge fund kings and queens and gurus on social media, on CNBC and Bloomberg that the Fed would push interest rates into the negative, just as central banks had done in Europe and Japan.

This was an effort to manipulate people into buying a 10-year stock with almost no yield, thereby driving yields further down and prices still higher, to make a lot of money for said kings, queens and gurus.

Whoever ended up buying 10-year maturities at the time had a very bad deal because it marked the bottom of the 39-year bond bull market, during which the 10-year yield had risen from 15.8 % in September 1981 to 0.52% in August. 2020 – not in a straight line – on falling inflation and falling interest rates, with some big swings in between, and since 2008 fueled by money printing and interest rate repression .

But now we have the Fed’s fastest rate hikes in 40 years and the Fed’s fastest ever QT, having unwound $381 billion in six months.

Mortgage rates followed a similar trend. The 30-year fixed mortgage rate began to rise in early 2021, from a low of 2.65%. But not in a straight line either. In April 2021, it had reached 3.18%, then it fell back to 2.78% in June 2021. At the end of December 2021, it had fallen back to 3.11%.

And then, as the Fed ended QE, then hiked rates, then embarked on QT, mortgage rates surged – interrupted by big bear market rallies, most notably the bear market rally in he summer when the average 30-year fixed mortgage rate fell 14%, from 5.8% to 4.99%, only to recover to 7.08% at the end of October. According to the Freddie Mac Index released on Dec. 1, the rate retraced some of that rise, dropping to 6.49%. This represents an 8.3% drop in average mortgage rates.

Since the beginning of 2021, we still have an uninterrupted uptrend in the 30-year fixed mortgage rate, marked by higher highs and lower lows, and a further drop would fit well into the overall uptrend:

The trend is your friend. There has been a tremendous amount of Fed pivot haggling and rate cut haggling and the Fed haggling will soon restart QE etc. This is all part of the normal game of how markets adapt to new realities, with each side pushing in its own direction, thus pushing markets up and down in a volatile fashion. But this is how functional markets adapt to new realities. Adjustments don’t happen all at once. And if they do, it’s a really scary deal. And they don’t adjust in predictable straight lines either. They get at it over time in their rough and rambunctious way, but eventually, they get there.

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