US Dollar: Higher yields threaten housing and risk sentiment – MUFG

MUFG’s Derek Halpenny highlights how elevated US Treasury yields and rising mortgage rates are beginning to weigh on the US housing market, with Housing Starts and Pending Home Sales softening. He notes that the July FOMC meeting and Chair Warsh’s communication have driven a rise in real long-term yields, while upcoming FOMC Minutes may have limited FX impact unless volatility broadens.

Yields, housing and FOMC minutes

"We mentioned here yesterday that there was zero appetite in the US for tackling the worsening fiscal outlook and the danger is that yields move to levels that trigger greater economic weakness and trigger asset price corrections as financial conditions tighten excessively."

"But the 30-year mortgage rate is now close to a one-year high and at 6.75% has a ways to go before retesting the 2023 high of over 8%. Pending home sales data for July saw a 2.3% MoM drop after a 4.8% fall in June and affordability is starting to have an impact. If UST bond yields remains at multi-decade highs US households will start to notice quickly."

"While the fiscal outlook and inflation concerns are ever present, when it comes to the specific trigger to the latest sell-off it was the FOMC meeting on 29th July. As stated here, breakevens do not indicate an upturn in inflation concerns and measures of fiscal risks have been relatively stable. So the rise in real long-term yields reflects the term premium and specifically the greater uncertainty over monetary policy fuelled by unclear communication from Chair Warsh."

"We’d expect limited FX fallout until we start to see more compelling evidence that higher rates are transmitting to a broader volatility spike."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)