Mortgage rates jumped yesterday, moving out of the range they’ve established for most of 2015. (See chart to the right.) They are now at the highest point since late 2014, in fact. They appear to be reversing course today, but the day (and the trend) are new.
I’ve said many times – including this week – that the market sets rates, and it’s a global market. Why did interest rates jump this week?
Germany! Yes, those darn Germans are messing with our economy again. But oddly, even the Germans can’t explain why their bond yields jumped this week.
You may recall that in an earlier article I mentioned that the European Central Bank was buying German bonds for the same reason the U.S. Central Bank was buying bonds a couple of years ago – to drive down interest rates to juice the economy. Their version of quantitative easing was so effective, in fact, that the 10-year German bond yields got pretty close to 0.00%.
This week the yield popped all the way up to 0.88%. That doesn’t seem terrible for a 10-year treasury bond – the U.S. 10-year treasury today is over 2.30%. However, the mere fact that the yields are so low itself induces volatility into the market. Think of it this way: when stock prices set new record highs, trading becomes faster and sellers are quicker to pull the trigger if they smell instability.
This is important, because bond investors in particular hate volatility. That’s why they bought bonds in the first place – to avoid volatility in the stock market. So, with investors nervous about their investment in German bonds, many of them sold this week – for no other reason than that they were nervous, as far as anyone could tell.
According to an article in Marketwatch by William Watts this morning, “It was European Central Bank President Mario Draghi who perhaps encapsulated it best—and possibly gave a tacit green light to further selling—when he told reporters Wednesday that the reversal in bund yields appeared to be a function of extremely low interest rates and that investors just need to get used to heightened volatility.”
But when volatility drives interest rates up, what happens then? Usually interest rates jump up a bit and stabilize at a new level until the market digests what happened, before either jumping higher or settling back down.
In other words, in the short run we’ll have to wait and see. In the long run, of course, we know that interest rates are going to move up. The wild card most likely to bring interest rates down is Greece. (It’s a global market, remember?) Greece missed a large payment on its debt today, and deferred it to the end of the month while they frantically negotiate with European Central banks for more time.
It’s an interesting problem. When you owe the bank a million dollars they have you by the throat. When you owe them a billion dollars, you have them by the throat. If Greece defaults it could force them out of the European Union, which could trigger massive world-wide stock market selloffs. Or, it might not.
So Greece may, or may not default on their debt. If they do default it may, or may not cause Greece to be forced out of the European Union. If that happens it may, or may not prompt a worldwide selloff of stocks. If stock prices tumble institutional investors may, or may not move cash into safe-haven bonds. If they do, bond yields will fall and mortgage interest rates may or may not follow bond yields down.
Do you see where this is going? Neither do I.
The point is, it is very likely (I am sorry to say) that we’ve seen the last of the ultra-low interest rates. Moving forward, the volatility induced when rates are extremely low will almost certainly bring them back up. So, if you see super-low interest rates again in the near future, please don’t hesitate; they will be there for only a day or two at a time.
For William Watt’s full article, click here.