Last week mortgage rates improved a little bit as bonds rallied. The bond rally happened despite a decent October employment report and some indications that inflation is picking up. It appears that the rally can be attributed to the tightening presidential race. The rally is the market pricing in the possibility that Donald Trump becomes our next president. Yields on ten-year Treasuries began the week at 1.84%, rose as high as 1.88%, and ultimately fell to 1.78% to end the week. I know that nobody really wants to hear anything more about the election, but it is going to be the primary driver of whatever market action we see over the next week (and perhaps beyond that).
For what it’s worth, Freddie Mac’s Primary Mortgage Market Survey showed the average rate on a 30-year fixed-rate mortgage was 3.54% with 0.5 points. Due to the way the survey works (the survey results are issued on Thursday and most of the responses are collected early in the week) the survey reflects conditions as they were early in the week. The bulk of the bond market rallied happened on Wednesday and Thursday, so Freddie Mac’s survey doesn’t reflect the late-week rate improvement.
Click here to get today’s latest mortgage rates.
The rate outlook:
So, the election. Here’s what I think might happen based upon the possible outcomes:
- Clinton wins, election is not contested: bonds sell off, a Fed rate hike in December becomes a virtual certainty, and mortgage rates rise. This is essentially a resumption of the trajectory we were on before last week.
- Trump wins, election is not contested: stocks probably sell off, bonds rise a little bit in a flight to safety, mortgage rates are flat or perhaps improve a little bit in the short term. In the longer term, I have absolutely no idea how a Trump presidency plays out. Bear in mind that this is a guy who suggested that defaulting on Treasuries could be a way to cut the national debt. He says so many things that I have no idea if he means any of it, but if a sitting President were even to suggest such a thing, interest rates would skyrocket overnight. A Fed hike in December becomes a lot less certain with a Trump victory. The Fed’s actions would likely be dictated by the immediate market reaction to a Trump victory in this scenario.
- Contested election: I think that a contested election is far more likely if Clinton wins than if Trump wins. I think this because Trump has equivocated as to whether he would accept the result if he doesn’t win. We haven’t heard any such talk from Clinton. Either way it will be a debacle. This could drag on for months or more, and it’s certainly worth noting that there are presently only 8 supreme court justices, so if it came down to a Bush v. Gore situation, we still might not get resolution. Equities would almost certainly sell off, and bonds might rally in a flight to safety. Or sell-off as confidence in all markets is shaken. Who knows? This is a bad scenario that is very real.
Let’s not ignore the Senate election (the chances that the Democrats take the house are very, very low). The New York Times shows the Democrats as having a 53% chance to take the Senate. If the Democrats do not take the house back, we’re going to be stuck with complete governmental inertia. The Senate could block Supreme Court nominations indefinitely, and Hillary would have almost no chance of getting any legislation passed. Even with a Democratic Senate, Clinton would have lot of issues with the Republican-controlled House anyway. One could easily imagine years of wiki-leaks/email investigations, impeachment attempts, etc. Longer-term, whether or not the Senate flips hands will be very important.
So where does this all leave us? With a lot of uncertainty, and little else. Ultimately I think Clinton will win, although I’m a lot less certain that Trump and his supporters will accept the outcome. From a rate perspective, I really don’t know where that would leave us. I don’t know what the Fed would do, and have no feel for what the markets might do.
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from Total Mortgage Underwritings Blog http://ift.tt/2eOtDQY
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