Are you looking to buy a new home or refinance at a lower rate? The media is talking about rates being higher for longer. And they are correct about short-term rates that don't impact mortgages as much as longer-term yields do. While the Fed plays political games to garner votes with short-term rates, the long-term yields that the Fed does not control have a seasonal pattern that typically results in lower yields. Understanding this seasonal pattern could save consumers thousands of dollars.
When can we expect to see lower yields?
The Federal Reserve controls the Fed funds rate out to one-year Treasury bills, which are short-term interest rates. Interest rates that have more impact on mortgages are the 10-year Treasury Notes and, to an extent, the 30-year Treasury Bond. Due to the risk of holding these longer-duration instruments, such as inflation eating into their returns, investors create an ebb and flow of supply and demand for these products.
While the Fed can leave the short-term rates flat, the ten and 30-year instruments yields can fluctuate based on this supply and demand. The upcoming seasonal we will discuss is such an occurrence that has repeatedly occurred historically.
This lower yield seasonal pattern has been so consistent that it impacts the stock market around the same time each year. In a recent article for Barchart, "Nasdaq Market Has Perfect Bullish Historical Pattern – Don't Sell in May! I wrote about how the stock market has rallied for 15 of the past 15 years. Businesses can borrow money at a lower cost when yields go down and create strong economies. You can use this seasonal pattern to time your loan financing as a consumer, just like businesses do.
What fundamentals drive this yield decrease each year?
Moore Research Center, Inc. (MRCI) editor Jerry Toepke says, "As financial assets paid from the private into the public sector in the form of taxes begin to work back into the economy, looser monetary liquidity eases upward pressure on interest rates and prices at the longer end of the yield curve normally lead the shorter end higher."
Another event that occurs each year on September 30 is the US government's end of fiscal year. Coming into the end of the fourth quarter, the government does not need to auction as many debt instruments, reducing some of the Treasury products supply. Historically, the year-end demand for treasuries has raised the long-end of the yield curve prices, which lowers rates.
Because these two events occur yearly, a seasonal pattern has resulted in lower financing costs during a specific period.
Mortgages
The average consumer is unaware of how interest rates change throughout the year. As a result, they overpay for financing on one of the most significant investments they will ever make: their home.
The recent interest rate for a 30-year loan, reported by Freddie Mac, was 7.02%, down from 7.09% the previous week. Nobody knows precisely where yields will go, but consider how much you can save by lowering your finance cost on a 30-year loan.
We will use the current median US home price of $412,000 as the loan amount. If the consumer gets a fixed 7% loan, their monthly principal and interest (P&I) would be $2,741. However, if they were to wait for rates to drop and could get a 6% loan, that same monthly P&I would be $2,470, a savings of $271 per month.
Technical
Source: Barchart.com
The exchange-traded-fund TLT appears to have bottomed in early April. The daily chart had a significant downtrend before the daily trend turned up (green box). As these prices increase, the yields and rates on loans go down. As long as the April lows hold, the seasonal rally should remain intact for the seasonal window, which we will discuss soon.
Source: Barchart.com
Another interesting instrument to follow for interest rates is the Notes-over-Bonds (NOB) spread. Or, as this spread is presented, the Bonds-over-Notes (BON) spread. The BON spread is also in a daily uptrend. The spread depicts how the prices of the 30-year Treasury bond are going up faster than the shorter-dated 10-year Treasury note. The results show that interest rates are falling faster on the long end of the yield curve than on the short end, which will reduce mortgage rates.
Seasonal pattern
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
MRCI is a seasonal research company that identifies recurring seasonal patterns and offers traders and consumers an opportunity to find opportunities.
Let's get right to this seasonal pattern!
Source: MRCI
The chart above is the 15-year pattern (blue line) of 30-year Treasury bonds. The yellow box represents MRCI research for an optimal balance of risk and reward where the prices of the 30-year bond have consistently risen in the past 15 years. The current seasonal window is open from about May 09 and closes on approximately July 08. For the past 15 years, this pattern has occurred 13 times, with an 87% occurrence rate.
Source: MRCI
An interesting point is that even during Covid, 2020 the pattern worked. Also, 2009 ended the credit crunch collapse, and the pattern still occurred.
The seasonal window currently being discussed will be followed by another one in July that will be open until the end of August.
If you're a consumer looking for lower interest rates, the end of August or early September typically has lower rates and possibly points to pay for a loan.
If the daily trend stays intact for traders, buying pullbacks using the futures market or holding TLT or IEF ETFs until the end of August may be a play if it meets your risk management and trading plan rules.
Ways for traders to participate
The CMEGroup Exchange offers futures contracts on the (TO) 10Y yield contract, the (VU) micro-ultra 10-year note, the ZN 10-year Treasury note, and the ZB 30-year Treasury bond. Equity traders can use the ETFs IEF or TLT. Options traders can find opportunities for both futures and equity products.
In Closing…..
We discussed the dynamics of short-term and long-term interest rates, emphasizing the importance of understanding seasonal patterns in long-term yields, which significantly impact mortgage rates. While the Federal Reserve controls short-term rates, the yields on 10-year and 30-year Treasury securities fluctuate based on market supply and demand. Historical patterns indicate that yields tend to decrease seasonally, particularly from May to late August. These periods can offer lower financing costs for consumers, potentially saving thousands on mortgage payments. The article encourages consumers and traders to leverage these seasonal trends for better financial decisions while considering other market factors and risk management strategies.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
