War Bluster Holds Mortgage Rates in Check
Wars are rarely a good thing. The costs nearly always outrun the benefits. A trade war is a war. A trade war looms.
President Trump announced $50-billion worth of tariffs on Chinese imports late last week. Retaliation was inevitable. Hours after Trump’s announcement, China’s Finance Ministry issued a list of 545 product categories of U.S. imports on which China will impose a 25% tariff.
Escalation was also inevitable. Trump responded to China’s tariff volley with threats to impose an additional 10% tariff on an addition $200 billion of Chinese goods. Beijing officials responded in kind. The officials warned they would retaliate with even more tariffs.
So what does this have to do with us?
Wars, including trade wars, instill anxiety because they raise uncertainty. When investors and other market participants are more anxious, they seek havens. If we’ve noted once, we’ve noted a thousand times that U.S. Treasury securities are frequently the go-to havens. Not surprisingly, demand for these securities has risen over the past week. When demand rises, yields fall.
We follow the yield on the 10-year U.S. Treasury note closer than most yields. As the yield on the 10-year note goes, so go mortgage rates. Demand for the 10-year note has lowered its yield by 10 basis points. Mortgage rates dropped slightly over the past week. Rate quotes on prime 30-year fixed-rate conventional mortgages hover around 4.625% based on the national average.
Rate quotes could be about as good as it gets for the short term.
The bluster emanating from Beijing and Washington unsettled financial markets. The bluster will pass, as all wind does. It may have already passed. Yields on Treasury securities and rate quotes for mortgages have crept higher in the past couple days.
The good news is that many borrowers stepped to the fore to exploit an opportunity. Mortgage application volume spiked notably higher, according data collected by the Mortgage Bankers Association (MBA). The MBA’s Market Composite Index increased 5.1% in the latest reported week. It was the biggest increase in total mortgage volume since the first week of January.
We have a slight reprieve in the rate-rising trend, Keep in mind, though, that consumer-price inflation is on the rise. This ensures another federal funds rate increase by the Federal Reserve. We should expect one, if not two, additional increases this year. We expect other interest rates to keep pace.