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Weak housing numbers kill FOMC rates momentum

Senior Credit Analyst

Fixed income weekly dose of realism, August 19–23 (Part 0 of 5)

The FOMC minutes release caused an immediate reaction in the interest rate curve, though the tapering timeline is still uncertain

Despite the increase in interest rates across the short-to-medium part of the yield curve after the FOMC minutes release, rates pulled at the end of the week after new home sales were released on Friday.

New home sales fell 13% in July versus the expected 2% on a seasonally adjusted yearly rate. This was the lowest rate in three years, and it has investors questioning whether a September tapering is realistic. To compound matters, the 8.3% increase posted in June was revised down to 3.6%.

While the increase in interest rates could have instilled a sense of urgency in housing market demand, it seems that instead, it has dampened demand. Potential homebuyers could now be feeling they missed the train—or perhaps real estate speculators realize the opportunity of cheap financing has passed.

Whichever the explanation, real estate was hit hard by the tapering timeline speculation. The weakness in the housing market may prompt the Fed to postpone tapering—or at least start with a $10-billion-per-month reduction instead of the expected $20-billion-per-month reduction.

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