Next Sunday, voters in Italy will decide on a referendum presented by Prime Minister Matteo Renzi which would reform the constitution to speed up lawmaking and to produce a more stable government. If the referendum fails to pass, there is the potential for many troubles to develop in Italy. First, much needed reforms for the Italian banking sector likely would be postponed, which would put many banks at risk of failing. Investors are concerned that this could impact banks throughout Europe. In addition, Renzi has said that he will step down if the referendum does not pass. His resignation would likely lead to a period of political uncertainty in Italy, and it could result in more power for a political group which favors leaving the euro. In the wake of the Brexit vote in the UK, investors would be very concerned if they saw the potential for Italy to exit the European Union. The most recent polls show that it may be a very close vote. Investors have reacted to the uncertainty by shifting to safer assets, including U.S. mortgage-backed securities (MBS). Since mortgage rates are set based on MBS prices, the news resulted in improvement. For the rest of [...]
In a speech this afternoon, Fed Chair Yellen surprised investors with a potential new twist on U.S. monetary policy. Yellen put forth the possibility that a “high-pressure economy may be the best approach to repair the damage done during the financial crisis. This would involve waiting longer in the business cycle than in the past to raise the federal funds rate. She acknowledged that this approach would run the risk of inflation rising above their 2% target level. Some of the hoped for goals of this twist for longer loose monetary policy would be to encourage business investment and to increase the number of workers who return to the labor force. The possibility of Fed policy which tolerates higher inflation caused long-term bond yields, including MBS, to rise.
Comments from an unnamed official at the European Central Bank (ECB) caused global bond yields to rise today, including U.S. MBS. The official said that a “consensus was being formed to gradually taper the ECB’s bond buying program when they decide that it’s time to conclude it. The plan would be similar to what the U.S. Fed did to end its bond buying program. The ECB’s program is currently set to expire in March 2017. At the last meeting in September, some investors were disappointed that the ECB did not announce an extension to the program. According to the ECB, the decision about when to end the program will depend on the performance of the economy. The next ECB meeting will take place on October 20. The added demand for bonds from central banks around the world has helped push down yields. Today’s comments caused investors to reduce their expectations for additional stimulus from the ECB, which was negative for both stocks and bonds. Wednesday October 5, 2016
This week, a major influence on U.S. mortgage rates will be the “Brexit vote on Thursday. It is very difficult to predict the effect on the global economy if the UK were to leave the European Union or whether it would lead to similar votes in other countries. Due to the economic uncertainty which would result, a vote for the UK to exit the EU is expected to be positive for U.S. mortgage rates, while a vote to remain would be negative. As each new poll shifts the odds, investors react immediately. This increases daily volatility, as investors factor the expected outcome into asset prices. For example, the latest poll showed greater support to remain, and mortgage rates have moved higher today.