Thursday, June 30, 2016 - Article by: Bart Castelli - Homestar Financial Corporation NMLS #70864 -
Mortgage rates trickled slightly lower today. I thought the bond and mortgage markets would settle down with some minor increases in rates - that was yesterday. I also believed there would be some settling in the UK leave vote - that was yesterday. While I said I expected interest rates would eventually move lower I was expecting some consolidation - that was yesterday. This morning the bond market began improving and MBS prices started better, it kept improving through the day, technically taking them to another in a string of 3-year lows over the past 2 weeks. The most recent, most noticeable catalyst for the move toward lower rates is the passing of the referendum for the UK to leave the EU (aka "Brexit"). Given the bounce back in stocks since last Friday, it is tempting to conclude that financial markets have "gotten over" their initial apprehension regarding Brexit. But the bond markets that underlie mortgage rate movement have not bounced back in the same way. In fact, they have not really bounced back at all.
I still believe the US rate markets are in the beginning of a consolidation phase after the precipitous decline in rates since last Thursday. The comments from Carney and the surprise decision by Boris Johnson not to seek the prime minister role today revived the safety move into safe treasuries and consequently MBS prices. It shows that I cannot count on a pause in the unexpected from the UK and the EU. Beside the UK/EU dilemma, more global economic outlooks from Fed officials. The EU economy is widely expected now to weaken over the exit vote and China is back-sliding. No inflation on the horizon. There is little reason for a massive reversal in the low rate environment that will continue to dominate. Trying to be one step ahead now is not reasonable. I hold to my outlook though that the US 10yr note yield will drop to 1.25% this year.
In summary, we are in a rare realm whereas locking vs floating is almost reversed. If you are in a short timetable to close, floating almost makes more sense here because rates are immediately benefiting from foreign economic and political turbulence. Loans with 45+ day closing timelines (mostly refinances) may need to capture the current markets before they are gone. With today's announcements from the central bank of England of potentially lowering rates, I think it's safe to float at least into tomorrow. The trend favors lower rates, but as most of us know, this can reverse very quickly, and sometimes with no apparent logical reason. Tomorrow could be another story.
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