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The bond market has already delivered the Fed cut everyone's been waiting for

Javier E. David
Editor focused on markets and the economy


For months, bond investors — as well as an extremely irate President Donald Trump — have been trying to nudge the Federal Reserve into a new easing cycle.

Ironically enough, however, an easing of sorts has been well underway for months. Historically low bond yields, which serve as benchmarks for lending rates, have been stimulating key sectors.

Most notably, a relatively stable housing sector, which has helped backstop consumer confidence.

“Bottom line, low mortgage rates and a still strong labor market with rising wages has helped housing to a point,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

In fact, low bond rates which have hovered near 2% — a level that Goldman Sachs expects to fall even further into next year —have been a saving grace, as have been muted price pressures.

Rates have largely been contained by the trillions of Treasury debt the Fed holds on its books from its quantitative easing spree, indirectly translating into a boon for the economy.

Even as the president continually harangues the Fed for lower rates, the bond market has delivered it. The housing market has been a mixed bag amid sluggish price gains and rising inventory, but rock-bottom rates have propped up mortgage applications and refinancings.

This photo taken Monday, July 1, 2019 shows new construction underway at Carraway Village, a mixed-use community in Chapel Hill, N.C. (AP Photo/Gerry Broome)

Last week, home builder PulteGroup’s (PHM) CEO cited interest rates as supportive of housing demand. And home building giant Lennar (LEN) recently reported quarterly earnings that blew past Wall Street’s estimates, with the company citing help from slowing real estate prices and low rates.

Boockvar, however, pointed out that the impact is limited, primarily because “for many first-time buyers the price is still unaffordable and many are renting instead.” Still, “I’ll also keep arguing that slowing home price gains is a good thing for the housing market, as it brings in more buyers.”

‘Tremendously strong’

Indeed, the world’s largest economy has been a standout considering other major countries are slowing, and the U.S.-China trade dispute that shows no signs of resolution. Even amid the uncertainty, economic growth checked in at a better-than-expected 2% last quarter.

Meanwhile, consumers have also remained in a buying mood. With jobs still plentiful, spending and confidence surged to an eight-month high in July, despite trade tensions.

“The U.S. consumer is tremendously strong,” Procter & Gamble Co. (PG) chief financial officer Jon Moeller told Yahoo Finance in an interview on Wednesday. Moeller explained he is seeing very little evidence of a U.S. recession.

Richard Sega, global chief investment strategist at investment firm Conning, which has $141 billion in assets, told Yahoo Finance recently that “for a good chunk of the economy, lower rates are better, [and] if you're in real estate the lower the rates the better.”

There are limitations

While housing has been “building itself back” from the Great Recession, Sega pointed out how low borrowing costs can undermine other sectors, like banking. “Lower rates compress margins and growth, and rates are so low it’s hard to generate [money] to cover costs.”

Surging consumer credit — which supports the vast majority of the U.S. economy — remains a worry for many economists. Even as benchmark interest rates fall, credit card rates recently surged to their highest levels ever. If left unchecked, some worry that an overhang of debt may eventually morph into an economic drag, much in the way student loans have.

Even the boost to real estate from low rates has its limitations, according to Daniel Silver, an economist at JPMorgan Chase.

“While several measures of home sales have firmed this year, the drop in mortgage rates hasn’t led to clear improvement across all of the housing indicators that we track,” Silver wrote in a research note.

“And even with home sales picking up recently, many measures of house prices show that house price appreciation has continued to slow through their latest reports,” he added.

Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek

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