Homeowners looking to move or refinance face quite a shock. Average mortgage rates have climbed above 7%, the highest in 20 years and up from about 5% a year ago, data from Freddie Mac showed Thursday. Economists say they could go even higher.
The reason behind the change is something rarely discussed by the typical homeowner—it’s the yield on government bonds.
U.S. Treasuries are the bedrock of the global financial system, arguably more important than even the short-term fed-funds rate. They provide the benchmark for thousands of financial products including mortgages, because they’re considered the least risky way to lend money. The government will always pay you back, the theory goes, assuming there are no shenanigans like the debt-ceiling battle in Congress earlier this year.
As the Federal Reserve raised short-term rates from near zero to above 5% since March 2022, 10-year Treasury yields didn’t rise nearly as much. They moved from about 2% to around 4%. But now they’re well above 4%, the highest since 2007, and rising.
That’s not down to fears of inflation, which is poison for bonds because it eats away at the lender’s return. Rather, bond investors have slowly come around to the idea that the Fed might not be able to cut rates as much as hoped once it breaks the back of the recent inflation surge. (Expectations for future rate cuts are the reason the yield curve has been inverted for more than a year.)
Strong results from retailers including Walmart and TJX are signs that consumers are still doing well. Higher bond yields are a way financial markets express more optimism about the outlook for the economy.
So, ironically, it’s the good news about the economy that is pushing mortgage rates up. That doesn’t mean homeowners have to be happy about it.
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Beijing Defends Yuan Amid Rising Economic Fears
China’s central bank has increased its protection of the yuan as fears about the health of the world’s second-largest economy continue to mount. Chinese tech stocks tumbled.
- To bolster the Chinese yuan, the People’s Bank of China fixed the currency at 7.2006 per U.S. dollar. That’s significantly below the average estimate of 7.305 per dollar, ING economists said. ING FX strategist Francesco Pesole said it was “the biggest defense of the yuan via fixing guidance on record.”
- The Hang Seng Tech index closed 3.6% down. Alibaba fell 3.4%, JD.com slumped 5.3%—extending its losing streak to six days— while Baidu fell 2.7%. The trio’s American depositary receipts were all lower in premarket trading Friday.
- Separately, Evergrande, China’s second-largest property developer filed for protection from creditors under Chapter 15 of the U.S. bankruptcy code Thursday, according to MarketWatch. It is a way foreign companies shield from creditors in the U.S. as they restructure.
What’s Next: TEconomists have become increasingly less confident about China’s ability to reach its annual target of 5% gross domestic product growth in recent days. Nomura economists are the latest to cut their forecasts, now predicting 4.6% growth, down from 5.1%. Morgan Stanley, and J.P. Morgan lowered their forecasts, to below 5% this week. Barclays cut to 4.5% from 4.9%.
CVS Health, Amazon at Center of Shift in Pharmacy Benefits
found itself in the middle of a major pharmacy sector shake up after Blue Shield of California dropped CVS’ Caremark pharmacy benefits manager in favor of offerings from a variety of companies including
and Cost Plus, which is owned by businessman Mark Cuban. The insurer, with five million members, wants to lower costs.
- Pharmacy benefit managers negotiate drug prices and provide other services. Blue Shield California is moving to use multiple providers with different functions. Amazon will do home drug delivery, Cuban’s Cost Plus will offer low-cost drugs, and Abarca will process claims. Caremark will still do specialty drugs.
- Blue Shield California believes it could save $500 million annually once its model is fully rolled out in 2025. It would pass the savings along to members. It wants to negotiate prices with drugmakers using a net price structure that eliminates rebates and hidden fees.
- CVS shares sank more than 10% after the news, but later in the day it said in a regulatory filing the move won’t materially affect its 2023 guidance or long-term outlook. In reaffirming 2023 guidance, it said specialty pharmacy makes up more than 50% of pharmacy benefit spending.
- Americans spent more than $630 billion on prescription drugs in 2022, 9% higher than in 2021. Amazon acquired online pharmacy PillPack in 2018 and began its own Amazon Pharmacy in 2020, using the draw of its Prime shipping service to boost interest.
What’s Next: The deal is also a reminder that Amazon is more than just an e-commerce and cloud-computing operation. In addition to pharmacy, it operates a movie studio, a media streaming division, the grocery chain Whole Foods, an electronic division including the Kindle, and an online ad business.
—Liz Moyer and Al Root
Maui Insured Losses Could Mean Higher Rates Across the U.S.
Insured property losses from the wildfire that devastated Lahaina in Hawaii last week are estimated to be about $3.2 billion, the catastrophe modeling firm Karen Clark & Co. said. The property and casualty insurance industry will cover the claims, but homeowners across the country could see rates rise.
- The insurance industry is, for the most part, well-capitalized, with a sizable cushion to pay out claims. According to the Insurance Information Institute, the U.S. property and casualty industry had $980 billion in capital at year-end 2022.
- The Lahaina wildfire losses come as insurers are facing at least $34 billion of losses through mid-July this year because of thunderstorm-related damage. It could be the costliest first-half on record for thunderstorms, Reinsurance broker Gallagher Re estimates.
- Insurers are raising rates, adjusting premiums, and scaling back coverage in high-risk areas. The upward pressure on premiums is likely to persist for a while longer. The average cost of homeowners’ insurance in the U.S. today is $1,700, up 10% from a year ago.
In July, Farmers Insurance said it would limit sales of homeowners’ policies in Florida and California, becoming the latest big insurer to pull back from the hurricane- and wildfire-prone states. State Farm and
have also stopped selling new home-insurance policies in California.
What’s Next: William Blair analyst Adam Klauber expects insurers to continue to restrict coverage in areas at high risk for wildfires. He also expects more consumers will have to turn to the less-regulated excess and surplus market for coverage, which will also come at a higher cost.
Walmart Focuses on Value as Shoppers Remain Choosy
beat expectations for the second quarter and raised its full-year outlook, but the largest U.S. retailer is still sounding cautious on the consumer. Households are facing challenges ahead, including higher interest rates and the resumption of student loan payments this fall, it said.
- CEO Doug McMillon says the company is focused on value as consumers prioritize spending on necessities such as food and hold off on discretionary buying. Grocery sales helped lift Walmart’s results in the quarter. The company is seeing shoppers being discerning, he said.
- Revenue rose 5.7% to $161.6 billion. Sales increased across Walmart’s U.S. and international sectors, but dipped 0.3% at Sam’s Club. Comparable-store sales, which measure growth in stores open for at least a year, grew for all three business segments.
also beat expectations and raised its outlook. It said its core customers, the low- to moderate-income segment, are facing persistently higher costs on necessities, and it continues to plan the business cautiously.
On the flip side, luxury retailer
which owns the Coach brand, joined other higher-end companies in saying demand for luxury goods could be challenged in the months ahead. Tapestry wants to buy Michael Kors parent Capri in a $8.5 billion deal.
What’s Next: Walmart said for the full year it expects earnings per share of $6.36 to $6.46, which is higher than its earlier forecast. Net sales are expected to rise 4% to 4.5%, up from a previous estimate of 3.5% growth.
—Sabrina Escobar and Liz Moyer
A UAW Strike Could Cost $5 Billion in First 10 Days
A possible strike by the United Auto Workers union against Detroit’s big three auto makers could result in a total economic loss of more than $5 billion in the first 10 full days, according to estimates from the consulting firm Anderson Economic Group.
and Chrysler parent
are continuing to meet with union negotiators. The consulting firm came up with its number by estimating potential losses to UAW workers, the manufacturers, and to the auto industry more broadly if those negotiations aren’t successful.
- Anderson said a 10-day strike would result in total wage losses of $859 million and manufacturer losses of $989 million. If only one auto maker shutdown due to a strike, it could cause $665 million in losses.
- UAW’s contract expires in September. The 2019 negotiations broke down into a 40-day strike against GM, which said the strike cost it about $3.6 billion in earnings that year.
- Vehicle inventory, which reached record lows during the Covid-19 pandemic, has been slowly trending upward to reach 162,000 units in June, Anderson said in a report Thursday. However, inventory is still well below September 2019’s 649,000 units.
What’s Next: The labor contract negotiations are going slowly, the union said, though the auto makers said they are committed to productive talks. Union members will likely vote soon on whether to allow the leadership to call a walkout. That doesn’t necessarily mean a strike will happen.
Do you remember this week’s news? Take our quiz below to test your knowledge. Tell us how you did in an email to [email protected].
1. U.S. Steel, formed in 1901 when Andrew Carnegie’s company merged with several others with the help of banker J. P. Morgan, is a takeover target, and is currently weighing options after rejecting an offer from which of the following:
c. PPG Industries
d. None of the above
2. Warren Buffett’s Berkshire Hathaway loaded up on stocks of home builders D.R. Horton, Lennar, and NVR in the quarter. How big was the combined stake at the end of June?
a. $200 million
b. $400 million
c. $600 million
d. $800 million
3. China has released a spate of gloomy economic news in recent weeks and this week cut a key interest rate amid signs its recovery from Covid-19 is stalling. It will stop reporting on youth unemployment figures after it rose every month this year and reached about how high in June?
4. Vietnamese electric vehicle start-up VinFast popped in its initial public offering this week, soaring more than 200% and ending its first day of trading with a market value around $86 billion, making it bigger than which more established auto makers?
a. Toyota Motor and Hyundai
b. Mercedes-Benz and BMW
c. Ford Motor and General Motors
d. Tesla and Rivian
5. Insured losses from the wildfire that devastated Maui in Hawaii are estimated to climb to how much, according to catastrophe modeling firm Karen Clark and Co.?
a. $3.0 billion
b. $3.2 billion
c. $3.4 billion
d. $3.6 billion
Answers: 1(b); 2(d); 3(a); 4(c); 5(b)
—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner