The 10-year Treasury yield keeps surging … how the mortgage market is pricing in the jump … homebuilding stocks look interesting … big news from Eric Fry

Another day, another recent high for the 10-year Treasury yield.

Yesterday, concerned traders pushed the yield up to 2.94%. We haven’t seen this level since 2018.

Keep in mind, the rise to this level hasn’t been gradual – it’s been a moonshot.

In early March, the yield sat at 1.72%. Below, you can see its near-breathless climb since then.

As I write Wednesday, it’s pulled back slightly to about 2.87%.

If you’re a trader, it’s hard not to be spooked when you have Fed President James Bullard saying he won’t rule out a jumbo 75-basis-point rate hike.

Yes, the Federal Reserve Bank of St. Louis President said that during a virtual appearance on Monday.

Now, it’s unlikely the other Fed presidents would get on board with such a scorched earth approach. But the once-unthinkable “series of half-point rate hikes” that Bullard wants is appearing increasingly likely. The latest Fed president endorsing such a hike is the Chicago Fed President, Charles Evans.

From MarketWatch:

(Evans) also indicated the Fed could raise rates by 1/2-point increments at least a few times this year, with the potential that the benchmark fed funds rate could eventually top 3%.

Legendary investor Louis Navellier updated his Accelerated Profits subscribers on this rate hawkishness in Monday’s issue. After detailing the latest consumer price index and producer price index numbers (both soaring), Louis added:

…I don’t think that we can claim “inflation has peaked” just yet…

Considering the March CPI and PPI data, I think it’s clear that the Federal Reserve will raise key interest rates by 0.5% at its upcoming Federal Open Market Committee (FOMC) meeting. 

***One place we see the market already pricing in the coming Fed hikes is mortgage loans

At the beginning of March, the average rate on the 30-year fixed mortgage came in at 3.90%.

Today, it’s 5.15% – a whopping 32% spike.

Related to this, here in the Digest, we’ve been watching an interesting contradiction play out in the housing market.

On one hand, given historically low housing inventory and rabid demand, you would think that investors would be flooding into homebuilding stocks, expecting a tsunami of profits as homebuilders crank out new homes to satisfy demand.

But that’s not what we’ve been seeing. Homebuilding stocks are in the toilet.

Why?

It appears Wall Street and homebuilders expect demand to drop thanks to this surge in mortgage costs. This has been showing up as a decrease in builder confidence in recent months.

From CNBC:

Builder confidence in the market for new single-family homes fell 2 points to 77 in April, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

Any reading above 50 is considered positive sentiment, but the reading marks the fourth straight month of declines for the index, which stood at 83 in April 2021.

“Despite low existing inventory, builders report sales traffic and current sales conditions have declined to their lowest points since last summer as a sharp jump in mortgage rates and persistent supply chain disruptions continue to unsettle the housing market,” said NAHB Chairman Jerry Konter, a builder and developer from Savannah, Georgia.

Yesterday, we learned that federally backed housing giant Fannie Mae expects a recession next year.

Here’s MarketWatch with how Fannie Mae sees this impacting housing sales:

(Fannie Mae) now expects housing sales to drop 7.4% this year and by 9.7% in 2023.

House price growth will slow from 20% in the first quarter to 3.2% by the fourth quarter of 2023.

***So, how might investors play this?

In our April 11th Digest, we profiled the iShares Home Construction ETF, ITB.

We noted how it was down 31% here in 2022 (at the time of that Digest), and suggested it was going on our trade watchlist.

Given that ITB has been in freefall all year, we don’t want to jump into a trade prematurely with momentum so negative.

On the other hand, the months of weakness are setting up a great entry-point price. Plus, sentiment is so pessimistic despite continued demand in the face of surging mortgage rates, that even a little bit of unexpected good news could begin a rally.

On that note, yesterday, we learned that housing starts unexpectedly rose in March. It was enough to send ITB up 3.7% on the day. As I write Wednesday, it’s up another 1%.

So, is it time to jump into an ITB trade?

Well, let’s look at the chart.

Below, you can see it dropping all year. However, in the last few days, it appears that ITB is trying to carve out a base. Plus, notice the Relative Strength Indicator (RSI) I’ve added in the bottom pane.

As you can see, it’s climbing as ITB’s price action firms up.

All of this is bullish.

On the bearish side of things, the Fed and how hawkish it will be remains a big mystery.

Yes, ITB’s decline means that Wall Street has already priced in much higher rates, as well as some of the slowdown that Fannie Mae is expecting next year.

But given Fed presidents like Bullard who are going “full hawk,” the extent of the coming hikes and slowdown might not be fully priced-in.

So, where does that leave things?

If you’re an aggressive trader who doesn’t mind the possibility of being early and sitting through some sideways (or even down) action, this is a reasonable entry point.

If you’re more conservative, wait to see if ITB re-tests and holds its low from earlier this month, and then begins setting a series of “higher highs” and “higher lows” in the coming weeks.

Yes, you might miss some early gains. But if this is a false bottom, caution will enable you to avoid whatever additional weakness is on the way.

We’ll keep monitoring.

***Finally, tomorrow, Eric Fry is detailing what he’s calling “The Trade of the Decade”

Regular Digest readers are very familiar with our macro expert, Eric Fry.

If you’re newer to the Digest, Eric’s track record is remarkable. He’s found an astounding 41 different investment recommendations that have gained more than 1,000%. Most investors are lucky to find one or two.

And don’t think that triple- and quadruple-digit gains aren’t something from Eric’s distant past. As the COVID pandemic hit, he recommended investments that gained 470%, 525%, even 1,506%.

I bring this up to help underscore the importance of paying attention to Eric when he feels strong conviction about an investment opportunity.

That’s exactly what’s happening today.

Eric has put together a time-sensitive presentation on an idea he believes could be the “Trade of the Decade.” It’s going live tomorrow at 4 PM ET.

Eric believes in this trade idea so strongly that he’s even revealing one of his recommended stock picks – totally free.

If you have money you want to put to work today to battle inflation, but are nervous to put it into the stock market given the heightened volatility, join us tomorrow to learn about this Trade of the Decade. This is not one to miss.

Have a good evening,

Jeff Remsburg