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 [...]
President Trump today said to expect an announcement about tax cuts in two to three weeks. Mortgage rates moved a little higher after the comment. There are two reasons why tax cuts are viewed as negative for mortgage rates. The first is that tax cuts increase the wealth of the affected individuals or businesses, leaving them with more money to spend. This added spending boosts economic activity, which increases the outlook for future inflation. Mortgage rates rise as expected future inflation rises, since higher inflation further erodes the value of a mortgage’s future cash flows. The second is that tax cuts increase the budget deficit, at least initially. This means that the government has to issue more Treasury bonds to fund the deficit. The added supply reduces the value of Treasuries and similar bonds, including mortgage-backed securities (MBS). A decline in MBS prices leads to higher mortgage rates.
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.
After holding the federal funds rate near zero for seven years, the Fed announced a rate hike of 25 basis points, as widely expected. This was the first rate hike since June 2006. Investors are now asking what the pace of future rate hikes will be. According to the Fed statement, Fed officials expect that economic conditions will warrant only "gradual" increases in rates. The statement also noted that the Fed does not expect to reduce its holdings of MBS and Treasuries any time soon. Investors were pleased that the Fed does not appear to be in any rush to tighten monetary policy, and MBS prices and stocks moved a little higher. Want to see live MBS prices on the go? Check out the new look of www.mbsquoteline.com from your mobile device. All features optimized for your device. | Questions call 800-627-1077