A vote occurred on the other side of the Atlantic last week, and the result was unanticipated by most political wonks.
As you no doubt know, the citizens of the United Kingdom voted their country out of the European Union. And given the immediate response from financial markets around the world, you’d have thought that they had voted themselves off the planet. Market participants responded by marking most everything down: stocks, commodities, global economic growth, and interest rates. (Gold, silver, and U.S. Treasury securities – havens all – bucked the trend to trade up.)
The yield on the 10-year U.S. Treasury note dropped nearly 25 basis points overnight to a level unseen since, well, never. Because long-term mortgage rates follow the 10-year note (though not in lockstep), the 30-year fixed-rate loan hit a four-year low. Sub-3.5% on the 30-year loan has become the new norm.
The UK vote – known by the tedious portmanteau “Brexit” – enables the UK to free itself from EU diktats, which can be stultifying at times. (For example, bottled-water manufacturers are prohibited from saying water PREVENTS dehydration.) By voting “yes” on Brexit, the Brits voted for more local control, which it appears they will get.
Market participants are worried that the Brits also voted themselves out of the European market. Worries were exacerbated by the notion that other EU countries – most notably France and the Netherlands – will also vote themselves out of the EU, thus starting a contagion that could end the EU. Should this occur, a worldwide recession would ensue, so we’ve been warned.
As a result, we’ve got a low-lending rate environment that’s likely to persist through the summer months. With the Brexit vote out of the way, no major global event resides on the horizon. This means mortgage rates are unlikely to trend much lower.