This is an interesting time in financial markets, and we want to help you understand the many elements currently in play.
Investors face a lot of significant questions on a wide range of issues right now, and it’s no surprise that they have responded to the increased uncertainty by reducing the level of risk in their portfolios. As usual, their primary method to accomplish this has been to shift assets from stocks to bonds, including MBS.
The trade tensions between the U.S. and China remain one of the largest sources of concern for investors. Tariffs and other barriers to trade slow global economic activity, which reduces the outlook for future inflation and is favorable for mortgage rates.
The outlook for global economic growth is another big question mark for investors. Around the world, the manufacturing sector clearly has taken a hit from the trade issues, and business investment has fallen as companies hesitate to make long-term capital commitments. On the other hand, U.S. consumer spending has remained quite healthy in recent months, and Alibaba (“the Amazon of China”) just released strong earnings results.
In addition, several geopolitical events around the world are concerning. Massive protests have been taking place in Hong Kong, Japan and North Korea are in the midst of their own trade dispute, Argentina faces serious economic deterioration, and Iran remains a potential source of trouble.
It’s also worth noting that mortgage rates have not dropped nearly as quickly as long-term Treasury yields. This is not uncommon during periods of rapid declines in bond yields due to the prepayment risk inherent in MBS. If refinancing occurs, the holder of the MBS no longer will receive the expected future interest payments, making the security less valuable. In this sense, lenders have mixed feelings about rapidly falling yields and mortgage rates may drop by a smaller amount than usual.
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