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Market Update

From the Desk of Jason Obradovich, Chief Investment Officer

Inflationary Fears

Alexis: Hey, everybody. Welcome back to the Mortgage Rundown. My name is Alexis Quinney and I'm here with Jason Obradovich, CIO of New American Funding. How have you been doing, Jason?

Jason: Doing well. Very busy, obviously, with the market, but doing well. How are doing yourself?

Alexis: I've been doing good. So, yeah, speaking of the market, there has been an increase in the last few weeks, and I wanted you to provide a little bit of context for our audience here. So, what has been going on with interest rates?

Jason: Yes. So, you know, it has been a very busy last few weeks. One of the things we touched on before was that Treasury rates have been moving higher and pretty much since last August they've gone up…and up almost every single month. But we just haven't seen much in terms of mortgage rates. Well, in the last few weeks, kind of around the beginning of February, we've seen mortgage rates go up and up and up. We've had this fear, this fear of higher inflation that's percolated into the Treasury market, has taken over the Treasury market, and now is starting to creep into mortgage rates. So, there has been a little bit of a market panic over inflation, which is just driving rates higher, hopefully in the short term.

Alexis: Will there be inflation throughout the rest of 2021?

Jason:  You know, that's a good question. I think the market's fearful that there is inflation that's happening right now, and we have a new administration in Washington, D.C. that's talking about all the stimulus, which creates more fears of inflation.

You know, just the rap that all this cash going into the system is going to create inflation. And so, thankfully, Jerome Powell came out yesterday and said, ‘Look, we shouldn't see the kind of inflation that we're worried about for three to four years.’ So, the market is panicking. I think it's excessive by a large degree. But, you know, this happens. This happens. Rates have been low for so long. There's always going to be this period where the market panics about rates. How long are they going to stay this low? And what's going to happen with inflation? And is the economy coming back together?  Are people going back outside again? All these different things.

There's always this natural phenomenon that it happens where people panic the other direction. Once they become so presumptive that something's going to stay, then they get fearful that it's going to change. And so, we're in the middle of that. So, I think there has been a lot of panic. It's a little bit excessive. But, you know, let's see. You know, sometimes these things run for a while. Maybe already at the end of it. We'll see.

Alexis: Yeah, good points. So, you brought up the stock market. What can we expect for the stock market in 2021? 

Jason: You know, stocks and bonds have have to look in the context of what's happening with each of the two. So, what happened in 2020 was the fear of the pandemic itself, the fears around future growth. Everyone piled into the bond market, you know, kind of a race from the stock market. But then a lot of people looked at the tech sector and some of these other sectors and said, ‘Look, do I want to invest in tech stocks which are doing really well during the pandemic because they're not as impacted as say, a restaurant? And/or do I want to invest in bonds that are earning 0.5% for 10 years?

You know what? They're going to take that risk and invest in those types of stocks. And so, you've just had this long run.

Generally, when rates are low, people pile into the stock market because the Fed’s saying, ‘Hey, look, we're going to support this market and it's pretty much pandemic proof.’ You know, that's what's really been proven out.

Is that going to change? You know, it's really hard to say. Tech stocks always go higher and higher and you question valuations and they move higher and higher and you question valuations and they move higher and higher. So, I can't really say necessarily where I think the stock market's going to do. I think you just have to look at the big picture and say the Fed's going to support the market, the Fed's going to support the economy. When do people actually care about valuations? And that's anyone's guess.

Alexis: OK, makes sense. Well, it sounds like a lot of stuff has happened in the last few weeks since we spoke. I'm excited for the next episode to see where we're at in the next few weeks. But is there anything else you wanted to touch on this episode?

Jason: I think people just need to understand there's been some volatility. We don't need to panic too much. Rates have been really low. They still are really low. They just weren't where they were at the beginning of February, the beginning of the year. And we might see a swing the other way. But it's just really a question of timing. The Fed's already said, ‘Look, we're years away from worrying about inflation, but in the short term, markets can be very irrational.’ So, you just have to take that into consideration and just not overreact.

Alexis: Got it. All right. Well, I guess we'll see. That's all I have for you today, and I appreciate the time you took. Thank you so much.

Jason: Great. Have a great day, everyone.

Alexis: Bye bye!

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