How might the shutdown impact mortgage rates?

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Well firstly, it already has to some degree.  Understand that the market doesn’t like uncertainty. We can really distill that reality into two phrases; Risk on and Risk off. If the market is in a Risk on mindset, investors are looking to take on risk to get yield or return.  The opposite is true of a Risk off bias.  Logically, one is less likely to take on risk in times of uncertainly, as it make the risk even riskier.  Therefore, right now the risk to the economy during a shutdown is severalfold.

Firstly, there are hundreds of thousands of workers partially or fully out of the workforce that are directly affected. Presumably they will spend less during this period, so businesses are indirectly affected by these furloughs. Lastly, much of the data that market participants use to trade stocks, bonds and the like aren’t made available during a shutdown. Therefore an already nervous market is somewhat flying blind.  Risk, on risk, on risk.

Couple this with a softening of data that lead into the shutdown and the result is a pretty friendly rate environment. Investors take off risk and embark on another term you may have heard, a flight to quality. The concept here is that government bonds are a safe haven asset as opposed to riskier stocks and other tradable instruments. This flight into bonds lowers yields and that usually lowers all other rates.

At the risk of getting a bit too technical here, we have seen the spread between government bonds and mortgage rates widen during this stretch.  This means mortgage rates haven’t dropped quite as much as bond yields, despite the correlation between the two.  With seemingly no end to the shutdown in sight, I wouldn’t be shocked to see rates continue to drift lower, however I advise some caution.  As aforementioned, the shutdown itself isn’t the primary driver here and moreover will end.  Therefore there will be some relief on investors when it ends and a bunch of data that could change the landscape of the risk appetite of the market.

Additionally, there’s an entire world around us that isn’t in a shutdown and those events impact our rates too, which leads me to one last economic catch phrase:  cautious optimism.

-Philip Mancuso

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