What a difference a week makes! Global equities rebounded throughout this week. The stock markets surged on what may have been an over-reaction to “Brexit”.

Last Friday was a vicious week for global equities as markets dropped in response to the unexpected vote by the United Kingdom to leave the European Union. This was all to the benefit of bonds as yields plunged both in the United States and abroad. How all of this works out is anyone’s guess, but, mortgage interest rates benefited from falling yields.

Uncertainty is very friendly for bonds. With so many complex issues surrounding the marketplace, we are biased toward U.S. bond yields going lower. However, it is hard to argue with locking in rates with the 10-year U.S. note trading near 1.400%.

Have a great 4th of July!

Global equity markets crashed Friday morning in response to the unexpected exit vote from the European Union (EU) by the United Kingdom (UK). This took the markets by complete surprise, in contrast to the sample polling conducted prior to the vote. Global bond yields fell sharply as investors sought the safe haven of bonds. No one knows for certain how this UK vote to leave the EU will affect the global economy long term, but the fear is that other European Union countries such as Germany and Italy will also want to leave the EU and this is not good for the global economy.

This uncertainty is the enemy of stocks but the friend of bonds and we could see more volatility and lower interest rates over the next several weeks as this exit vote plays out.

We continue to remain biased toward locking in interest rates for a few reasons:

1. Many lenders are resisting lowering interest rates as bank margins are already severely compressed.
2. It is too hard to time the interest rate market with so many complex market moving events.
3. We know the Fed would like to raise interest rates even though they cannot do so at the moment.

The Fed has used most of its monetary policy tools to stoke the economy with tepid results. Increasing interest rates will provide the Fed more ammunition to combat the next recession.

Global bonds cheered dovish statements made early in the week by the Federal Reserve which saw the German 10-year note go negative, the Japanese 10-year note go further negative and the U.S. 10-year note dip to around 1.50% in response to the Fed’s comments about the sluggish economy and future interest rate increases.

The reason for the drop in interest rates include fears of a slowing global economy, the United Kingdom’s potential exit from the European Union, and the flight to safety that investors are seeking in a very complex, globally integrated world.

With interest rates so low, it is hard to not recommend locking in loans. Therefore, we remain biased toward locking for two reasons. First, interest rates are very attractive so there is no shame in locking in at these levels even with the possibility that yields still may go lower. Second, banks are struggling with such low interest rates, which is compressing their margins and some lenders are resisting the urge to lower rates further.

The prospect of negative interest rates in Europe and Japan continue to drive high demand for U.S. bonds. Even with the 10-year U.S. Treasury dipping to around 1.65%, our interest rates in comparison to Europe and Japan are very attractive (the Japanese 10-year note is currently negative – WOW!). The reasons behind negative interest rates are not encouraging: anemic economic growth, deflation fears, declining earnings growth, and the lack of inflation. It seems that no matter what global central bankers attempt to do to stimulate the world economy, the results are muted.

For our purposes, the extraordinarily low interest rates have helped spur real estate transactions. Yet the long-term impact of such low interest rates does concern some of the experts as valuations of all asset classes reach all time highs.

With the 10-year U.S. Treasury trading at current levels, we are biased toward locking in interest rates at these low yields. However, it would not surprise us to see interest rates in the U.S. to continue to go lower.

The May jobs report surprised the markets on the downside. Non-farm payrolls rose by only 38,000 jobs in May, which was well below the 155,000 expected. This is the lowest jobs number since September 2010. While the unemployment rate declined to 4.70%, the actual employment numbers were weak.

The Labor Force Participation Rate (LFPR) was the key in the unemployment rate, which fell to a four-decade low of 62.60%. The LFPR is the percentage of working-age persons in an economy who are employed or are unemployed but looking for a job.

The big takeaway from this report is that the odds of June rate hike are probably completely off the table.

The U.S. bond markets responded positively (as expected) to this poor jobs number. Both short-term and long-term bond yields are rallying hard this morning with the 10-year U.S. Treasury trading at around 1.700%.

With interest rates trending this low again, we remain biased toward locking in interest rates at this time. However, we would be surprised if interest rates went lower after this very poor jobs report.

Trading is light today in advance of the long Memorial Day weekend. In economic news, the first quarter second reading of GDP rose to .8% from the first reading of .5%, which is lower than the expected .9%. This new reading, though a slight improvement, is still weak. On the housing front, home sales climbed in April to the highest level in 10 years. This is a good sign that the housing market is gaining momentum propelled by steady-as-she-goes job creation coupled with low interest rates. This is positive news for mortgage professionals, as well as for appliance manufacturers and home builders.

June will be an interesting month for the bond and equity markets as there has been some hint from the Federal Reserve that a rate increase in short-term interest rates is now on the table. We will be watching how this news affects these respective markets later in the month. One negative effect of the recent Fed-speak on short-term interest rates is a flattening of the yield curve. This has put some pressure on the shorter end of the yield curve, while the long end of the curve has not risen much. Still, interest rates remain attractive regardless of the flattening of the yield curve.

It’s important to monitor the yield curve because it serves as a benchmark for all mortgage and lending rates.

At the moment, our bias is toward cautiously floating interest rates into the month of June, with a watchful eye on the markets.

The latest reports show very low inflation. The Producer Price Index (PPI) rose just .2% in April over March which was less than the .3% expected. With inflation pressure light, interest rates should remain low in the U.S. in the near term. Abroad, specifically in Asia and Europe, central bank stimulus programs have continued and poor economic reports will also suppress global interest rates. Collectively, all these data points translate into lower interest rates over the long haul, which hurts savers but helps speculators, investors, and stock pickers.

It would seem like a no-brainer to lock in interest rates with the 10-year U.S. Treasury Note trading at ~ 1.730%, but many experts believe U.S. interest rates will decrease even further.  Some economists fear that the U.S. economy is beginning to resemble Japan’s with low growth, low yields, and weak demand. Even with the prospects of potentially lower yields, we continue to be biased toward locking in interest rates at these exceptionally low levels.

The April jobs report was weak with the U.S. adding only 160,000 jobs against predictions of over 200,000 new jobs. But much to the surprise of experts, the U.S. bond market did not see lower interest rates as a result of this soft report.  This weak report will make it hard for the Federal Reserve to raise interest rates at their next meeting and rates may stay low for longer (good for new home buyers, but bad for savers).

On a related note, Jeffrey Gundlach, the widely followed “bond guru,” openly criticized negative interest rates this week saying that this central bank easing policy is akin to deflation. He, like many, feels that negative interest rates are a bad monetary tool and should be phased out. 

Focusing in on the mortgage market, we continue to remain biased toward locking in interest rates at the current levels. Interest rates are low and given that the weak job report in April did not further reduce mortgage rates, we don’t believe floating interest rates on new transactions is wise.

Equity markets closed out the week lower with the worst weekly sell-off since the earlier part of the year. Here in the U.S., the Federal Open Market Committee prepared statements that continue to ensure low interest rates. With inflation tame and anemic global economic growth, the chances for a June rate hike are currently pegged at 15%. The U.S. economy is performing well in some respects but continues to struggle in others. By the Fed’s own assessment, growth and consumer spending have slowed despite gains in income and employment and a strong housing market.

Mortgage interest rates remain attractive with the 10-year Treasury Note trading at 1.83%. As previously stated, we continue to be biased toward locking in interest rates with rates this low, with the awareness that interest rates could go lower given all of the economic and political uncertainty.