Treasury note yields spiked to kick off the first few trading days of March as investors continued to assess the Federal Reserve's expected rate hike at its upcoming meeting. The yield on the 2-year Treasury note traded at its highest yield since 2006, closing out Thursday at 4.9%. Meanwhile, the 10-year yield eclipsed 4%, increasing to 4.066% by the end of trading Thursday. 

The Fed's next meeting will be March 21-22 and it is expected that committee members will vote for another 25-basis point rate hike. The question for investors is how long the Fed will continue to increase interest rates and if it will revert back to a more aggressive quantitative tightening (QT) stance that could potentially mean larger rate hikes. Currently, the Fed is expected to raise rates at least three more times this year instead of two. 

Inflation is still running extremely high and the labor market has remained robust despite the increased federal funds rate. The full February jobs report from the Labor Department is set to be released March 10, but the jobless claims released in the first few days of March show the number of Americans filing new claims for unemployment fell again. The Labor Department also reported that labor costs grew faster than previously reported in Q4, which means wages are going up which is keeping inflation elevated. 

Simmering underlying inflation has continued to put upward pressure on mortgage interest rates as we enter the last month of Q1. Freddie Mac's 30-year fixed-rate mortgage average moved up by 15-basis points week-over-week to settle in at 6.65%. Freddie Mac's economists said in their release, "As we started the year, the 30-year fixed-rate mortgage decreased with expectations of lower economic growth, inflation and a loosening of monetary policy. However, given sustained economic growth and continued inflation, mortgage rates boomeranged and are inching up toward seven percent. Lower mortgage rates back in January brought buyers back into the market. Now that rates are moving up, affordability is hindered and making it difficult for potential buyers to act, particularly for repeat buyers with existing mortgages at less than half of current rates."

A silver lining for buyers is that one piece of the inflation puzzle that continues to cool is home prices. December's S&P CoreLogic Case Shiller national home price index increased by just 5.8% year-over-year. That is dramatically slower than the near 20% pace of growth we saw for 2021. This also marked the sixth-straight month of declining home price appreciation. 

That declining home price growth, along with mortgage rates that cooled off to start the year, helped get a lot of homebuyers under contract in January. The National Association of Realtors reported that signed contracts on homes increased by 8.1% from December to January and marked the second straight month of growth. 

Since that time, mortgage demand has fallen significantly as rates quickly rose again. The Mortgage Bankers Association's weekly survey showed demand dropped by 5.7% week-over-week. Joel Kan, MBA's Vice President and Deputy Chief Economist, said in the news release that, "After a brief revival in application activity in January when mortgage rates dropped to 6.2 percent, there has now been three straight weeks of declines in applications as mortgage rates have jumped 50 basis points over the past month. Data on inflation, employment, and economic activity have signaled that inflation may not be cooling as quickly as anticipated, which continues to put upward pressure on rates."