If you have paid attention to interest rates over the past week you’ve noticed an increase. It’s about 0.25 percent across the board on loan programs and terms. That’s a pretty steep increase in such a short time. The 10-year Treasury Note opened trading Monday morning at its highest level since December 2015. It’s time to panic, right?
Nope. Not at all. However, it is important to get a feel for why rates have jumped. There are two reasons: newly elected president Donald Trump and the Fed’s anticipated rate increase. One of these was expected to occur while the other one wasn’t.
Let’s discuss these a bit in detail and start with the presidential election. Leading up to Election Day I was asked numerous times about forecasting rates. My response was consistent: If Clinton won, rates would stay steady as markets would have less change to consider from one administration to the next. If Trump wins, who knows. The volatility of the markets reflected that sentiment as the Dow was down more than 800 points in pre-market hours as election results were being tallied but ended Wednesday’s trading day up more than 250 points. That’s more than a 1000-point swing in less than 24 hours.
Why such a large swing? Most research shows that panic from the reality of Trump being our next president created the overnight sell-off by many investors. That same panic was calmed as many other investors reacted positively in projecting that Trump’s plans would create economic growth. Trump is promoting more infrastructure, de-regulation of the Dodd-Frank Act (legislature put into law in 2010 to add regulations to financial markets and institutions) and lower taxes – many things that sound good to a lot of investors, banks and corporations. The stock markets have continued Wednesday’s rally reaching new highs. The 10-year Treasury yields also increased with the stock markets, which is normal behavior during a rally like we’ve seen. Remember, as this yield rises, so do mortgage rates.
Additionally, the Fed is expected to raise its key rate this December. Do you remember what happened in the weeks leading up to the Fed rate hike in December 2015? The 10-year yield increased in anticipation of the rate hike. Once the rate hike occurred the yield dropped back down causing mortgage rates to drop, too. A similar reaction is happening now. This is slightly different because this speculation is adding to the market’s reaction to the newly elected president.
The important thing is to not panic. Whether President-Elect Trump will or will not follow through with items on his agenda is yet to be seen. Even if he is successful at things like lowering taxes or de-regulating parts of Dodd-Frank, it’s going to take years to implement and to feel its effect. And even then, these things may not end up being positive like some investors think. This rate burst appears slightly exaggerated because the unexpected occurred.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268