With fears of global coronavirus contagion slamming financial markets Monday, U.S. bond yields are plummeting as well, pushing mortgage rates which tend to follow the 10-year Treasury yield toward a four-year low.
The average rate on the popular 30-year fixed mortgage reached 3.42% on Friday, according to Mortgage News Daily. That is the rate for borrowers with robust financials and credit scores. With stocks tanking Monday, that rate could sink even lower.
Aside from one day in the summer of 2016 when rates hit 3.34% before launching significantly higher that autumn, it has been since 2012 that rates were this low. While rates typically follow the 10-year yield, there are certain market factors that keep rates treading water above a certain level.
“When rates fall this quickly, it’s not so much that big banks draw the line on mortgage rates, but rather, the underlying Mortgage Backed Securities (MBS) market refuses to improve as quickly as the Treasury market,” said Graham. “Both mortgages and Treasuries are feeling the impact of coronavirus panic. That’s pushing rates lower. But mortgages also become less valuable to investors if they get paid off too quickly.”
Payoffs and refinances are spiking higher right now. Applications to refinance a home loan are up around 165% annually, according to the Mortgage Bankers Association.
Ultra-low interest rates and a flood of debt issuance by US companies have also resulted in the tacit accumulation of risks in some of the world’s largest bond funds. Exchange traded funds managed by BlackRock, Vanguard, Charles Schwab and State Street control assets of about $140bn that follow the Bloomberg Barclays US Aggregate bond index, the most important benchmark in fixed income markets globally.
But soaring US bond prices and record low yields have also heightened the risk of losses for investors in Agg tracking funds, like the iShares Core U.S. Aggregate Bond ETF (AGG), according to GMO, the Boston-based fund manager.
“The Agg is a portfolio that has turned prudence on its head,” said Peter Chiappinelli, a member of GMO’s asset allocation team.
Meanwhile, investors concerned about sinking rates who are not invested in bond funds have been looking to gold ETFs such as the SPDR Gold Trust ETF (GLD) or the VelocityShares 3x Long Gold ETN (UGLD) which have been moving well with the precious metal in the last month.
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