Last Monday (May 28), we wrote that May was on pace to be the worst month for stocks since 2010. This post came out when the Dow was at 12,454.83 (it is now down to 12,101.46), and 10-year Treasury yield was around 1.70 percent (it is now at 1.50 percent). In other words, since we last talked… things have changed for the worse. Here is what happened:
May 30 – Stocks dropped 1 percent on investor fears about possible contagion stemming from Greek and Spanish debt. European leaders openly discussed the risk of Greece leaving the Euro and possible default of its debt. The 10-year U.S. Treasury bond yield hit a 60-year low at 1.63 percent as investors began moving to the “safe haven” of U.S. Treasury bonds.
May 31 – Troubling U.S. economic indicators influenced a fresh round of selling on the market, and the 10-year bond yield fell further – to 1.55 percent. The market moved on reports that initial jobless claims in the U.S. rose to 383,000, the 7th time in 8 weeks that this number increased. Another report showed that employers cut 52.6 percent more jobs in May (61,887) than in April (40,559). The Commerce Department revised U.S. first quarter economic growth (Gross Domestic Product) down to 1.9 percent (from the 2.2 percent). The Dow finished its worst month since May 2010.
June 1 – A dismal employment report helped influence another stock sell off as the Dow (- 274.88 points), the S&P 500 (- 32.29 points) and the Nasdaq (- 79.86 points) all fell 2 percent for their worst day of the year. The U.S. added just 69,000 new jobs in May and the national unemployment rate increased 0.1 percent to 8.2 percent. Meanwhile, the bond market flooded with activity. Yields on the 10-year Treasury moved below 1.50 percent, down to 1.46 percent (a record low).
So what does this all mean for interest rates?
Remember, as investors buy up U.S. Treasuries, bond prices increase (due to demand) and bond yields fall. The 10-year U.S. Treasury bond tracks the 30-year mortgage interest rate, which is a fancy way of saying that the 30-year rate moves in tandem with the 10-year yield falls. With the 10-year yield hitting new record lows, did mortgage rates respond in kind?
The answer is yes, but not to the extent we expected. As we wrote on Friday:
“Mortgage rates, meanwhile, have not showed the kind of response we would have hoped to see… Historically, there has been a 1.50 percent spread between the 10-year yield and the 30-year interest rate, which means that we should be seeing 3.00 percent 30-year rates. Unfortunately, we are not… rates are still around 3.5 percent.
“Why have we not seen lower rates? It could be that banks are electing to take larger profit margins instead of moving rates lower. It could be a concern of a quick correction and an unwillingness to take on new mortgages at lower interest rates if the prices don’t hold.”
That being said, mortgage rates have dropped even lower from what were already record lows. The 30-year fixed (3.500 percent, 3.517 percent APR) and 15-year fixed (2.875 percent, 2.858 percent APR) both improved throughout the week along with the 10-year yield.
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