Oct 182016

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By G. Steven Bray

Interest rates continued their rise last week reaching the highest levels in 4 months. They’ve plateaued so far this week, but don’t assume the market has lost its steam. As I mentioned last week, I think concern about what the European Central Bank will say this week is powering this run.

The ECB will announce its policy decisions on Thurs. The world’s central banks have been fueling an easy money bender for the last few years. Rumors that the ECB was preparing to taper its asset purchase program sobered up markets in a hurry a couple weeks ago.

When the Fed began to taper its quantitative easing in 2013, mortgage rates moved up more than 1% and fairly quickly. It took a couple years before rates began to approach the same levels as before the tapering announcement. Using history as a guide, the threat for higher rates is definitely real. While actions of the ECB don’t directly affect mortgage rates, the assets they purchase are fungible, and US bonds will feel an impact.

With the scary stuff out of the way, let’s be clear that ECB tapering is not a foregone conclusion. The European economy is still weak, and the Brexit is still a huge unknown. If you’re willing to roll the dice, it’s quite possible the ECB will announce an extension of its program, which probably would push mortgage rates back to the levels seen earlier this month.

We have one more thing working for us. I suggested last week that you keep an eye on inflation reports. The two most recent readings were weaker than expected, which takes some of the pressure off rates.

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