Rates & Mortgages Update – February 2024

The one-two punch of a boffo jobs report followed by the January CPI report offered on February 13 reminded investors that it is not a good idea to “fight the FED”. The FED DOTs issued last month suggest only three 25bp interest rate cuts this year to lower their target rate from its current 5.37% [5.25 to 5.50%] to 4.62% [4.50% to 4.75%]. On the other hand, speculators, led by “Team Transitory”, had anticipated as many as six rate cuts to 3.87%. This can be gleaned from the December 2024 Fed Funds contract that touched 96.27 (3.73%) only one month ago.  In fact, as recently as February 1st the market expected a 3.98% rate.

With the December Fed Funds contract (see Figure 1) trading near 95.51 (4.49%), a lot of the speculative froth has been blown away, and a more balanced trading profile has returned.

As offered at year-end, our view remains that there will be three rate cuts, which do not start until the July meeting.  Moreover, the rate cut regime will steepen the curve with a fulcrum at the 10-year note rotating near 4.00%. Near par MBS at trading at +150bp to UST 10 years remains one of the single best fixed-income investments from our vantage point.