Rates Fall Further

U.S. mortgage rates continued to improve in the week following Brexit — the British vote to leave the European Union (EU). Surprisingly, stocks also rallied. U.S. stocks have reversed the losses incurred immediately following the vote. Mortgage rates have fallen to the best levels in years.

Financial markets remained volatile in the week following Brexit. For the first couple of days, investors sold stocks and bought bonds, including U.S. mortgage-backed securities. During this period, both stock prices and mortgage rates fell. This is a pretty typical reaction to an event such as Brexit. The decision to exit the EU created a high level of uncertainty for investors, causing them to shift their holdings to safer assets.

However, the latter half of the week was not so typical. Usually when the consequences of an event become clearer, there is a reversal of the initial flight to safety. The reaction to Brexit has been unusual in that mortgage rates continued to fall while stock prices recovered their initial losses.

Investor expectations for additional central bank stimulus may be the reason for the unusual reaction. Officials from the Bank of England said that further stimulus likely will be needed to smooth the transition. The European Central Bank (ECB) also may need to add stimulus to the European economy to boost economic growth. In addition, Brexit likely will cause the U.S. Fed to wait longer before raising the federal funds rate. In recent years, additional stimulus has been good for both stocks and mortgage rates.

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