How Low Can Rates Go?

Each week, we see interest rates as low as they’ve been in our lifetime. We obviously continue to live each week, and each week we continue to see interest rates at the lowest we have ever seen. (Of course, one week one of the two conditions  – the living or the falling interest rates – will give. Needless to say, we prefer the latter to give first.)

This week, the yield on the 10-year U.S. Treasury note hit another all-time low, dipping below 1.37%.  Mortgage rates aren’t quite at an all-time low, which occurred in December 2012, but they’re darn close.  Quotes on a conventional 30-year fixed-rate loan frequently range between 3.25% and 3.375% on best execution these days.  As for the 15-year loan, quotes are well below 3%.

Again, we look to the other side of the Atlantic for the cause. Financial markets rallied over the second half of last week, but they pulled back again this week. It seems market participants, after having a holiday weekend to mull things over, returned to work Tuesday thinking there is still considerable market risk associated with the U.K. Brexit vote.  Investors re-embraced haven assets – precious metals and U.S. Treasury securities.  Prices in both asset classes have risen meaningfully over the past week.

At this point, you would think the odds of the Federal Reserve raising rates would be zero for the remainder of the year.  That’s not the case.  Traders in federal funds rate futures contracts are pricing a 6% chance of a rate increase at the Fed’s September meeting (even though they’re pricing contracts with a 2.4% chance of a rate cut later this month).  Last week, they weren’t giving odds for an increase until December.

But as we are quick to note, traders can be a schizophrenic lot, as can Fed officials.  The June meeting contrasted sharply with the April meeting. Back then, many Fed officials chatted up the possibility of rate increases in the near future. At the latest meeting, everyone softened his stance, evinced by a 10-0 vote to hold rates steady.

Falling interest rates have certainly impacted our corner of the word. Refinance applications have taken flight, which comes as no surprise. More important to the housing market, purchase applications are again moving higher.  The Mortgage Bankers Association Purchase Index was up 4% last week after treading water over the previous three weeks.

So, again we ask: How low can rates go?

What occurred this past week may have been one last spastic reaction to the Brexit vote. In that case, rates could start trending higher, especially when you consider no other major event hangs over our heads.  With nothing hanging over heads, the risk for rates to move higher rises. In short, it’s tough to argue against locking in at today’s rates.

Information provided by Jessica Regan.

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