Thanks to soybeans, air planes and cars – mortgage rates may drop. Of course I am referring to China’s proposed $50 billion in US trade tariffs on aircraft, autos and Edamame.
Stocks, Bonds & Home Loan Interest Rates
Why would this news make mortgage rates possibly drop? We call it a “flight to quality”. Here is how it works. Consider the following truths:
- Investors can invest in Stocks or Bonds
- Stocks represent the economy and have no guaranteed return
- Economy does well / stocks do well & vice versa (in general)
- Bonds are a “sure thing” with regard to paying an investor a return (albeit a small return typically)
- When investors invest in Bonds – mortgage rates drop
How Soybeans Could Force Mortgage Rates Down
Considering the truths above, China’s $50 billion proposed US trade tariffs could power mortgage rates downward. U.S. Investors see the tariff’s as a potential economic stumbling block. As such, the value of an investor’s stock portfolio suddenly becomes unstable.
To protect their capital, investors move money out of their unstable stocks over to secure bonds (sell stocks/buy bonds – with the same money). Bond’s small guaranteed rate of return is better than losing money on sliding stocks.
Finally, mortgage rates drop when money flows into the bond market. This dynamic is exactly what I see as a possibility based on today’s news. The money coming into bonds from the sale of stocks results in falling mortgage rates.
In conclusion, higher taxes on soybeans mean better mortgage rates – makes sense right?
By Jeremy House