Mortgage Rates Take a Nosedive

Mortgage rates nosedived today following the surprise victory of the referendum for the U.K. leaving the European Union (aka "Brexit").  This joins the ranks as one of the few days in history where rates have moved a full eighth of a point in a single day.  Last night I was waiting to see what was going to happen and when it did, I along with everyone else was caught off guard as all of the global financial markets were leaning the other way.

Stock markets around the world declined, global money center banks were hit hard and the EU was completely shocked. No one was positioned for the outcome. This was the day that is going to re-shape the EU and the countries within it. The UK voting to leave has financial market implications and questions about how the future of the EU and its bureaucratic structure will be changed. The Brits did not vote against the economic climate, they voted to take their sovereignty back from unelected ‘dictators’ in Brussels and the 40K EU employees that were created by the EU politicians. 

The vote will reverberate for months while the unwinding takes place.  Some are saying it could take as much as two years to accomplish – which could also be another concern that everyone is now thinking.  The exit based on article 50 in the EU charter allows for two years to complete the exit.

There is as much uncertainty and wild speculations that I have not seen in many years.  There has been as much debate and comments from so many media guests - like Alan Greenspan saying this vote is as or more concerning than when the 1987 US stock market crash that drove the DJIA down 23%. From those that believe this is an opportunity for US markets. From those that believe large global banks will have to chop 10s of thousands of jobs. From speculation that the Fed may have to lower rates instead of the unrealistic idea of increasing rates in the next two years. In other words it is nothing more now than complete speculation about what the outcome will eventually be for global growth, equity markets and interest rates.

It makes little sense now to offer up any speculation, and I will not.  Everyone who is speculated is grasping at straws. What is not speculation is that the vote has lit a fire that people are increasingly fed up with politicians focusing on globalization and less on individual concerns of the people.  The “little man and woman” have had it.   All of the hand-wringing about how markets got it wrong should be directed to the future implications of the peoples’ revolt we saw today - that is how the markets got it wrong.

The good in all this is that markets have a couple of days to think rather than speak. Next week expect continued volatility and maybe more serious thinking than what we all saw day today.

The 10yr closed at 1.56% after testing the 1.46% range before trading began.  MBSs were very strong and settled at a positive 60BPS. 

In summary, world markets appear stunned from the results of the vote.  The trend is our friend.  Interest rates in the US are going to decline some more – but the path will be volatile. Some are speculating that the 10yr will hit 1.25%, which I have been reiterating here for several weeks. Floating now seems like the best bet, but do not get too greedy – Remember “Pigs Get Fat, Hogs Get Slaughtered!”