Thank the British for Today’s Lower Mortgage Rates

A vote occurred on the other side of the Atlantic last week, and the result was unanticipated by most political wonks.

As you no doubt know, the citizens of the United Kingdom voted their country out of the European Union.  And given the immediate response from financial markets around the world, you’d have thought that they had voted themselves off the planet.  Market participants responded by marking most everything down: stocks, commodities, global economic growth, and interest rates. (Gold, silver, and U.S. Treasury securities – havens all – bucked the trend to trade up.)

The yield on the 10-year U.S. Treasury note dropped nearly 25 basis points overnight to a level unseen since, well, never.  Because long-term mortgage rates follow the 10-year note (though not in lockstep), the 30-year fixed-rate loan hit a four-year low. Sub-3.5% on the 30-year loan has become the new norm.

The UK vote – known by the tedious portmanteau “Brexit” – enables the UK to free itself from EU diktats, which can be stultifying at times. (For example, bottled-water manufacturers are prohibited from saying water PREVENTS dehydration.) By voting “yes” on Brexit, the Brits voted for more local control, which it appears they will get.

Market participants are worried that the Brits also voted themselves out of the European market.  Worries were exacerbated by the notion that other EU countries – most notably France and the Netherlands – will also vote themselves out of the EU, thus starting a contagion that could end the EU.  Should this occur, a worldwide recession would ensue, so we’ve been warned.

Last week, we mentioned that we remain skeptical that the Federal Reserve would raise the federal funds rate before the end of the year. After the Brexit vote, we now have plenty of company. Traders in fed funds rate futures contracts are no longer giving near-term odds on a rate increase; the odds have shifted to a rate decrease.  Futures contracts are trading with a 6% chance that the Fed will cut the fed funds rates at its Sept. 21 meeting.  Odds for a rate increase don’t arise until the December meeting. The odds given are only 13%.

We think the potential negative consequences of the Brexit vote are unduly amplified. Yes, feelings are hurt and passions are inflamed, particularly among the losing side and among continental Europeans. But in time, cooler heads and rational thought will prevail.  The EU and the UK will maintain trading relations and the world will go. As for a global recession, It’s possible, but also improbable.

For now, we’ve got a low-lending rate environment that’s likely to persist through the summer months. With the Brexit vote out of the way, no major global event resides on the horizon. This means mortgage rates are unlikely to trend much lower.

There’s no overriding reason to lock at this point, but there’s also no overriding reason to float. Just keep in mind that rates tend to rise faster than they fall.  

Information provided by Jessica Regan.

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