CU Economist Says Rising COVID Concerns Pushing Down Interest Rates

CUNA Mutual Group’s latest report said lower interest rates are being driven by the market’s expectations that Americans will take longer to reach herd immunity from COVID-19 than previously expected.

In February, CUNA and CUNA Mutual Group forecast the 10-year Treasury rate would rise from 0.90% in 2020’s fourth quarter to reach 1.50% by this year’s fourth quarter. Its April forecast raised the estimate to 2% by this year’s fourth quarter. Its June forecast showed no change.

CUNA Mutual Group’s Credit Union Trends Report released Tuesday said long-term interest rates have been falling since March 31 when the 10-year Treasury interest rate hit 1.74%. It recently fell below 1.2% — down more than 50 basis points in three months.

Steven Rick, chief economist for CUNA Mutual Group and the report’s author, wrote that the drop in long-term interest rates has, in turn, pushed down interest rates for 30-year fixed-rate mortgages.

Freddie Mac showed the 30-year fixed rate started the year at 2.65%. It rose to a peak this year of 3.18% for the week ending April 1 before receding to 2.78% for the week ending July 22.

“Don’t be surprised if the 10-year Treasury interest rates remain below 2% for the rest of the year and mortgage interest rates remain below 3.25%,” Rick wrote. “Falling interest rates will extend the mortgage refinance boom many credit unions have benefited from over the last year.”

Higher-than-expected refinancings led the Mortgage Bankers Association on July 21 to raise its forecast by 3.1% for total originations for the full 12 months of this year compared with its June 18 forecast. It said it now expects $3.57 trillion in first-mortgage originations this year, down 6.6% from 2020. It started the year expecting a 24% drop.

Rick wrote that bond market trends show many investors believe recent high inflation will be temporary and that inflation will return to the Federal Reserve’s long-run average of 2% when supply chain disruptions get resolved. Investors are more worried that the Delta variant of COVID-19 will lead to low growth and low inflation.

“Falling inflation expectations have also driven down interest rates over the last two months,” he wrote. “The bond market is reducing its anxieties that the economy may overheat in the second half of the year as it appears less likely that the U.S. will reach herd immunity any time soon.”

Members have benefitted from the lower rates, but the mix left in credit union portfolios is generating lower interest margins.

The Trends Report showed credit unions held $537.5 billion in first mortgages on May 31, up 8.5% from May 2020 and up 0.5% from April.

Total loans stood at $1.21 trillion on May 31, up 4.5% from May 2020 and up 0.8% from April. Since December, credit union first mortgage loan balances increased by $12.9 billion, while vehicle loan balances only rose $6.1 billion.

“First mortgage lending has made up the lion’s share of loan growth over the last five months,” Rick wrote.

The report showed new auto loan balances rose 0.5% from April to May, an improvement from the 1.2% drop in May 2020. However, on a seasonally adjusted annual rate, new auto loan balances fell 1.5% in May, extending a string of declines to 23 months.

“The month of May is historically the beginning of the new auto lending season, so we expected a credit union lending turnaround,” Rick wrote.

Car loans accounted for 32.3% of loans in May, the lowest in six years. Higher-yielding unsecured and credit card loan balances made up 9.4% of all loan balances in May, the lowest in credit union history.

“This is one of the factors pushing credit union yield-on-asset ratios to record lows this year,” he wrote.