Mortgage Rate Update August 11, 2016

Mortgage rates are slightly improved from Monday.

Interest rates here in the US remain near historic lows at the same time as our stock markets hover at all-time highs.  I wrote about this unique relationship HERE.  Normally when stocks rally it is at the expense of interest rates but given the challenges overseas the US remains a safe-haven.

Consider this, an investor who wishes to have the “safety” of buying bonds (in effect lending the US government money) the current yield on the 10-year treasury note is ~1.54%.  Or, they could invest in the 30 stocks in the Dow Jones Industrial Average and earn annual dividends of ~2.78%.  Historically bond yields tend to be higher than dividend yields because the equity investor also gets the prospect of stock price appreciation whereas the bond investor is “guaranteed” a return of principal in the future.

The fact that stock dividends are presently higher than bond yields suggests that investors don’t foresee much stock price appreciation in the near-term and/ or believe interest rates will potentially go lower in the future (in which case they could sell their bonds yield 1.54% at a premium).

From a technical perspective US interest rates are treading gingerly at a significant level of support.  Should today’s $15 billion US treasury 30-year bond auction be met with weak foreign demand I anticipate mortgage rates could worsen slightly.  I recommend locking to play it safe.

Current Outlook: locking bias