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![\"fredgraph\"](\"https:\/\/ezmortgages.us\/wp-content\/uploads\/fredgraph3.jpg\")
<\/a><\/p>\nAverage 30yr fixed mortgage rates bounced between 4.1% on the low side and 4.6% on the high side since about June of last year. It\u2019s pretty rare for rates to remain within such a narrow range for so long. But, that doesn\u2019t mean they can\u2019t remain in this range for a lot longer than anyone, including me, thinks they will.<\/p>\n
At its simplest, it\u2019s a supply and demand function that will drive rates. But, there are some key variables that shape that supply and demand curve. Those are:
\n\u2022 The Fed tapering of their Quantitative Easing program
\n\u2022 The level of economic recovery in the US and abroad
\n\u2022 Yield spreads between mortgage backed securities, US Treasuries and similar government debt including German Bunds
\n\u2022 Inflationary \u2013 or disinflationary pressures
\n\u2022 When, or if the Federal Reserve and central banks around the globe begin normalizing their various benchmark rates, in our case the Federal Funds Rate
\n\u2022 Geopolitical events\/tensions<\/p>\n
The Federal Reserve is currently on pace to cease their massive bond-buying measure, known as Quantitative Easing, by their October 2014 meeting. The concern since the taper was announced in May 2013, has always been two-fold: Primarily that the Fed was the ONLY market for Treasuries and Mortgage Backed Securities. So, if they withdrew their purchases, who would buy them? Secondly, that the US economy was so weak that it needed the easy money policy to prime the economic pump.<\/p>\n
Those fears manifested in the rate spike, as seen on the graph above, in May last year. However, as you\u2019ll further see, since then, rates have steadily drifted lower over time. Demand for US debt (whether Treasuries or Mortgage Backed Securities) has remained strong.<\/p>\n
According to the Treasury Department\u2019s International Capital (TIC) data, although China has slowed some of their buying recently, Japan has increased their purchasing, and Belgium has come from essentially nowhere to be the third largest international holder of US Treasuries (a quick aside, there is at least one giant clearing house located in Belgium, which is why Belgium made that jump. Seeing who\u2019s actually the owner\/holder of those treasuries is easier said than done.)<\/p>\n
At least as importantly, if you\u2019re an institutional or government investor, and need to park some funds in a relatively low risk vehicle, to generate some returns, the US is still the best game in town. Sure, the yield on the 10yr US Treasury is only 2.4%-ish now, but\u2026 How \u2018bout German Bunds? Less than 1%. Japan? A fraction of 1%, and so on. We\u2019re the best horse in the glue factory, some might say. That could keep demand relatively high, keeping a lid on yields.<\/p>\n
Oh, and there\u2019s that little rumbling of the EU beginning its own QE program, to spur inflation and\/or drive off deflation, which would drive their rates down further, relative to ours.<\/p>\n
Furthermore, Mortgage Backed Securities \u2013 despite offering more risk \u2013 offer a pretty handsome return, relatively speaking, too. Perhaps more so in light of underwriting guidelines that strive to address a borrower\u2019s ability to repay. So it seems the demand is likely to remain steady, at least for the foreseeable future.<\/p>\n
Economically, the US, Canada and Mexico appear to be doing pretty well, particularly relative to the rest of the world. Will that help recoveries take hold across the globe, or are we just one significant shock from slipping back towards or into recession?<\/p>\n
In my view, the US economic picture definitely seems to be improving. Employment figures are looking stronger, whether by the unemployment rate, numbers of people quitting (presumably for better jobs) and in some sectors there is even a bit of upward wage pressure. Corporate earnings are strong. The housing market is plodding along after seeing another round of fairly ridiculous appreciation in many places, over the last 24 months or so. Personal and corporate balance sheets are largely improved, and debt levels are relatively low. If all those trends continue, the US should enter a period of reasonable (3%+) GDP growth, annually. Yes, that would be below trend of prior recoveries, but those prior downturns were not of the deleveraging style we just had.<\/p>\n
The bigger question is whether the US economic recovery can help rev up economic engines around the world. In the recent past economists have theorized that the US economy can, and will, drive that of the world. The saying was, if the US catches a cold, the rest of the world gets the flu. Likewise, if the US is feeling strong, that will help strengthen other nations\u2019 economies. On the other hand, there\u2019s also been speculation that as other economies mature, they\u2019re less dependent upon the US, and that the world is increasingly \u201cdecoupled\u201d so a US recovery may not expand beyond its borders.<\/p>\n
My best guess it that regardless of any direct link, the economic recovery in the US will continue to strengthen. As will those in the Eurozone, and elsewhere. Economic cycles are exactly that. Cycles. They\u2019re not going to move in a straight line in any direction.<\/p>\n
Certainly the EU has some greater challenges still ahead of it, but I don\u2019t believe anything that will send their member states into economic ruin, nor dismantle the EU experiment. If anything, I see them forming a more solid union, leading to something more along the lines of the United States of Europe.<\/p>\n
China may have some issues and struggles as they continue to shift more to a domestic consumption model of economic growth, but when they\u2019ll materialize and at what force, is anyone\u2019s guess. I don\u2019t see any massive disruptions from China, in the near term, at least.<\/p>\n
The larger question is how long will the current divergent economic paths between the US, Germany, the other EU member states, and other countries around the globe continue?<\/p>\n
Germany definitely appears to have hit a soft patch. They\u2019d previously been the engine of the EU\u2019s economic recovery.<\/p>\n
Historically, there\u2019s been a fairly strong correlation between German Bunds and US Treasury yields. Currently, that spread is the widest it\u2019s been in 15 years (Susanne Walker, Bloomberg, August 25, 2014). That could mean that if Bunds drift lower, Treasuries may follow. On the other hand, if the German and EU economies begin turning the corner towards more sustained growth, perhaps they\u2019ll rise, closing the gap that way.<\/p>\n
The fear is that the EU may already be too late to fight deflation. The EU didn\u2019t pull out the QE playbook as quickly as Bernanke and the Federal Reserve did. They\u2019re threatening to open it now, but have yet to do so. If they do slip further into economic stall mode, and begin printing money as the US did, what level of impact will that have? Will it simply distort further the relationship between German Bunds and US Treasuries, or will it pull treasuries down along with German Bunds?<\/p>\n
The good news? So far, inflationary pressures in the US remain anchored, while slowly creeping towards the Fed\u2019s target of 2%. That means there\u2019s no hurry for the US to begin raising rates while the EU and their member states drive theirs lower.<\/p>\n
That buys the Fed time to sit, continue watching key economic metrics and try to communicate to the markets what they\u2019re seeing and when they perceive they\u2019ll need to begin taking the next steps of normalizing monetary policy.<\/p>\n
Most people project an increase in the Federal Funds Rate around this time next year. I\u2019m thinking that may be further out, still.<\/p>\n
Lastly, there are always potential geopolitical tensions that can\/will flare up. There\u2019s the Middle East, with hot spots in Iraq, and Syria exacerbated by the rise of ISIS. There\u2019s the never ending Israeli and Palestinian conflict. The Ukrainian conflagration w\/ Russia continues to percolate. And, less publicly covered, China continues flexing its muscles within the Asian sphere.<\/p>\n
What role each of those factors will play in the direction interest rates take, is anyone\u2019s guess. We\u2019ve basically been at ridiculously low rates for about five years now. Enjoy \u2018em while we\u2019ve got \u2018em.<\/p>\n
I\u2019m still working on my better crystal ball, to help me predict the future with more accuracy. So far, I\u2019m not making much progress. I\u2019m open to suggestions anyone may have though.<\/p>\n
In the meantime, here are your rates ending this week. Please don\u2019t hesitate to call or email if you, your friends, or family have questions about buying or refinancing residential or commercial real estate.<\/p>\n
Cheers!<\/p>\n
E<\/p>\n