Bonds traded sideways this week. There was no major headline, but the markets continue to grapple with whether the slowing world economy will lead to a recession here in the U.S.
On a positive note, some good corporate third-quarter earnings and talks of a Brexit deal were good for the equity markets.
On the bearish side, poor retail spending, a lower than forecasted housing starts report and a poor regional manufacturing survey are potentially worrisome. The consumer has been the mainstay of the U.S. economic expansion for the last many years so if they stop spending then the U.S. economy would certainly feel it. Bond yields were capped by news from China that their economy grew at the slowest pace in almost three decades. The tariffs are certainly hurting China’s overall economy which suggests a trade deal with the U.S. may be closer than some think.
Mortgage rates remain attractive and borrowers continue to enjoy the benefits of these low rates in the form of lower payments or the ability to buy a larger home. As we have stated previously, interest rates should be locked-in at these levels. The 10-year has moved from below 1.500% up to 1.75%. For the moment, there is just not enough bad news to move bond yields lower, especially in light of some comments from European and Japanese officials about the lack of effect of negative interest rates. The Fed meets again on October 31st, and the comments from this meeting will be impactful on the future direction of rates.
Some positive headlines on trade negotiations as well as good consumer readings, modest corporate profits, and low inflation data helped stabilize the equity market this week. Bond yields seem to have hit a floor with the 10-year U.S. Treasury touching a low of 1.47% before settling at 1.50%. While the yield curve remains inverted and should be closely watched as it has historically foretold past recessions, fears of recession quieted this week as the markets stabilized after last Friday’s ugly trading day. However, there remain many potential landmines in the coming weeks that could turn markets for the worst beginning with an increase in tariffs on Chinese goods September 1st, a highly anticipated Fed meeting, and a no-deal Brexit at the end of October. With negative rates in Europe and Japan, U.S. mortgage rates will only move so high, which should keep investors analyzing riskier asset classes such as equities and real estate for yield.
What is not making headlines is the fact that lenders are so busy that in order to slow the flow of business rates are being increased. This disconnect is creating opportunities for some smaller lenders to compete with larger money center banks on deals that they would usually not be able to compete on. Our office continues to see increased volume from our clients who are both buying new real estate and refinancing currently owned properties with favorable terms.
As we mentioned last week, our stance is to lock-in interest rates at these attractive levels, especially with the added knowledge that lenders are filling up to the point where rates may have to rise lender by lender to slow down the volume. This does not mean rates couldn’t go lower, but with the 10-year at ~1.500%, there is no shame in locking in loans at these low levels.
The “Sell in May and Go Away” theory is on full display as stocks endure a tough week of trading to the benefit of lower bond yields. The main culprits are ongoing trade tensions with China and strong rhetoric from President Trump concerning Mexico. The U.S. will begin imposing tariffs on Mexican goods coming to the U.S. until Mexico applies stricter measures to help halt the illegal immigration crisis. This surprised the market on Thursday. Adding to the volatility is a slower growing global economy, negative interest rates on German and Japanese government debt, and fears of a potential recession. All of these factors have helped push U.S. Treasury yields to a many months low even against the backdrop of strong consumer confidence, a 3.1% GDP 1st quarter reading, and a fairly decent first-quarter earnings season. For the moment, it certainly is a tale of two stories with the “fear trade” winning.
Mortgage rates are also benefiting from lower rates and low inflation readings, but not as much as U.S. Treasuries. We continue to advise borrowers to take advantage of this very low rate environment as it would not take much to push yields higher should some positive comments come out of Washington or Beijing concerning trade talks.