The bond market reacted to the Fed’s December Meeting minutes where it was revealed they were going to start actively engaging in Quantitative Tightening (QT).  What does that mean?  They already started doing Quantitative Easing (QE).. meaning they started buying less mortgaged back securities and treasuries as of last November and set to complete the tapering by March 2022.  Then they will start raising the short term Fed Rate.  QE removes the Fed as the number 1 buyer of mortgage backed securities and treasuries slowly removing the biggest buyer/demand in the market.  You know what this does to an asset class… it softens the prices; therefore increasing the yield (or rates).  This moved the market some in November, but it was expected.  Then the Fed will start raising the Fed Rate, which will move up short term rates for HELOCs, consumer debt, personal loans, etc.  This will also raise the short term mortgage bonds (i.e. the 2-year) and rates (i.e. the 5/1 ARM and 7/1 ARM).

So .. back to Quantitative Tightening.  It simply means the Fed will start cutting off their “repurchasing”.  So QE is purchasing less.  QT is allowing the balance sheet to run off naturally.  For example, when a mortgage pays off through a refi or completion of the loan, the Fed will allow that debt to mature instead of using those funds to buy more.  The market did NOT like that.  Just means less buying from the biggest buyer, less demand, more supply, softening prices, higher rates.

Higher Rates Means Tighter Affordability