Stock Market Crash Destroys Interest Rates

Casey Fleming

On November 30th I wrote that the impending Fed’s bump in short-term interest rates would not impact interest rates on mortgages. On January 4th I wrote that eventually the Fed’s will influence mortgage rates when they decide that the danger of inflation from a booming economy will allow them to slow down the economy by halting the purchase of mortgage-backed securities.

Long-term yields just fell off a cliff
Long-term yields just fell off a cliff

Boy, has a lot happened in the last ten days. The S&P 500 has declined over 8%, and stock markets worldwide are reacting as if there is a recession coming.

Interest rates have reacted in their normal way to a declining stock market, which is to go down as well. How low? The chart to the right tracks the 10-year Treasury bond. This doesn’t drive mortgage interest rates, but does tend to be a leading indicator. I’m showing you the trend from November 30 to now.

On the 4th I wrote that interest rates would probably be fairly stable throughout the year, and this has been largely true so far. But if the trend holds, next week may well be totally different.

The "wholesale" cost of interest rates just dropped - when does the other shoe drop?
The “wholesale” cost of interest rates just dropped – when does the other shoe drop?

Take a look at the chart to the left. This is my ongoing study of interest rates over time. The red line tracks the 10-year bond, which as I mention above is a fairly reliable leading indicator of long-term rates.

The blue line is the Fannie-Mae 60-day yield, which actually does drive wholesale mortgage interest rates (the rates lenders are being offered by Fannie Mae.)

The green line is the Freddie Mac survey of locked interest rates, so it measures the interest rates that borrowers actually got. This tends to lag the other indices when interest rates drop, because lenders don’t offer lower rates until they are confident the downward trend will last.

OK, pay attention!

The falloff in Treasury Yields and the Fannie Mae 60-day yield is the clearest I’ve ever seen.

If the stock markets continue falling next week, or even stabilize, we will see lower interest rates next week than we have seen for a year or more.

If I’m right, remember you read it here first.

If I’m wrong, I’ll delete this post and deny it ever happened.

OK, not really, although it’s tempting.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
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Long-term yields just fell off a cliff
Long-term yields just fell off a cliff

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