Feb 022016
 

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By G. Steven Bray

Mortgage rates continue to please, dropping to their lowest levels in over 6 months last week. The drop came courtesy of the Bank of Japan, which surprised markets by introducing a negative interest rate policy on Fri. Interest rates worldwide improved immediately.

The next two weeks could determine whether the downward trend continues, but the outcome may be counterintuitive.

Markets are pricing about a 35% chance the Federal Reserve hikes short-term rates again at its Mar meeting. While Fed rate hikes don’t directly affect mortgage rates, they should be in response to the Fed’s perception of the strength of the economy. And a stronger economy typically leads to higher mortgage rates.

Overseas data so far this week continues to suggest a slowing global economy, but in the US the data is mixed. The jobs report on Fri caps a heavy week of US economic data. While last month’s jobs number was surprisingly large, 40% of the new jobs went to 16-to-19 year-olds. I think chances are this month’s report will be disappointing.

That should be good for mortgage rates. However, if it squashes the Fed’s lust for rate hikes, it just might stop our rally, at least temporarily. Fed Head Yellen testifies before Congress next week. If she suggests the Fed is going to hit the pause button, stock markets should rally. Some of that money that has been flowing into bonds and pushing rates down is likely to reverse direction. That doesn’t necessarily mean higher rates, but it does remove one source of demand for bonds.

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