We have one last Fed announcement left for the year, and up until yesterday most were in agreement that another 25bps cut is happening. Data and Fed comments from this week left investors questioning if the state of the economy warrants another cut. We are back to both short- and long-term rate expectations being revised higher.

If you feel like you’ve heard the story of markets positioning for lower rates only to adjust them higher, you have. This has been the case for over two years, and it will continue being the case. It makes sense that the market always positions lower than it should, as about 2/3 of money managers today have only been around for zero and low rate periods + QE, so they’re eager for such environment to return.

All of this market repositioning and shifting expectations has been moving the yield curve around. The yield curve is finally steepening (after 2 years and some months!), so now we are on the path to a healthier rate environment, which doesn’t necessarily mean a lower rate environment. The way the curve is shifting back to its normal structure is by moving long-term yields up (10YR+) and short-term yields down (<=2YR). This is why rates have been moving up since September. While this is not a good thing for mortgage rates right now, getting the front-end of the curve to yield lower than the long-end is important if we want a market with liquidity where we are able to offer rates at par and premium. It will also mean less volatility.