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The average 30-year fixed rate mortgage (FRM) rate decreased to 3.66% in the week ending November 22, 2019. The 15-year FRM rate also decreased to 3.11%. FRM rates rose significantly in 2018, but have fallen back in 2019, now below a year earlier. The long-term rising trend has briefly stalled as the Federal Reserve (the Fed) drops interest rates as we head into the coming recession, expected in 2020. In response, expect interest rates to remain low throughout 2019. Rising interest rates discouraged homebuyers and decreased their purchasing power in 2018, causing sales volume and prices to slip going into 2019. Now begun, the downward trajectory for prices and sales volume will continue in 2019, not to recover until after the next recession is over, in 2021-2023. FRM rates are tied to the bond market, tending to move in tandem with the 10-year Treasury Note (T-Note) rate. Bond market investors are feeling discouraged in light of the slowing economy and instability emanating from the federal government. This has led them to accept lower yields in return for the safety of treasuries, which in turn has kept FRM rates down in recent weeks. FRM rates will remain low over the next two-to-three years. The spread between the 10-year T-Note and 30-year FRM rate is 1.9%, far above the historical difference of 1.5%. The higher margins seen through much of 2018-2019 signify that mortgage lenders, uncertain of the market’s future, are padding their risk premiums.

The number of residential mortgages refinanced in California jumped in the second quarter (Q2) of 2019. 76,200 mortgages were refinanced in Q2 2019, above the 46,100 mortgage refinances taking place in the previous quarter and well above the number of refinances closed one year earlier. Recently, refinancing was most popular at the end of 2012, when mortgage interest rates were at all-time lows. When interest rates rose, refinancing simply made less sense for homeowners. Refinances bounced back in 2016, only to fall through the end of 2018 alongside rising interest rates. In 2019, mortgage rates have fallen back temporarily in preparation for the coming recession. Refinances have responded accordingly, increasing as rates have decreased. 2012 was the bottom of a 60-year rate cycle: 30 years of descending mortgage rates, followed by another 30 years of rising mortgage rates. Thus, the long-term outlook is one of steadily rising rates. However, the Federal Reserve (the Fed) began to drop rates in 2019 in preparation for the next recession, which will keep interest rates low for the next three-to-four years before they resume their upward march. Therefore, expect refinances to continue to rise through the end of 2019 and into 2020, in tandem with decreasing interest rates. Refinances made up 50% of the 152,500 mortgage originations in Q2 2019, with purchases making up nearly all the difference. This share is higher than the previous quarter, as mortgage originations plateaued in Q2 2019 and falling interest rates have attracted a higher number of refinances. The single largest influence on the downward trend in refinancing over the past 12 months has been the increase in mortgage rates through much of 2018, followed by falling interest rates in 2019. Today’s lower mortgage interest rates are held down by bond market investors and the Fed’s efforts to hold benchmark rates steady, for now.

Bloomberg) — A bond-market warning light that glowed green for years is suddenly flashing red. The bad news for bondholders is that the last time this happened, it was accompanied by the biggest sell-off since the aftermath of the global financial crisis.
That indicator is the term premium, which, for both Treasuries and German bunds, has snapped back from last quarter’s record lows. The U.S. gauge is now on track for the biggest three-month increase since late 2016.
After a stellar rally through August, global bonds have pulled back in recent weeks as thawing trade tensions lightened the global economic gloom, sapping demand for the safety of sovereign debt. Rebounding term premiums now signal the sell-off has further to run — the measure of extra compensation for holding longer-term debt versus simply rolling over a short-tenor security for years is in an uptrend that investors and strategists say has only just begun.
The 10-year Treasury yield, a benchmark for world markets, climbed Thursday to a three-month high as investors’ animal spirits were sparked by the ebbing of the biggest headwind to global growth — the U.S.-China trade war. That came as its German counterpart surged to levels unseen since mid-July and those in France and Belgium climbed back above 0%. The Japanese equivalent jumped Friday to its highest since May.
Investor are increasingly worried about holding longer-term debt as easing economic anxiety raises the prospect of a capital flight out of haven assets into riskier ones. Such a trend is already driving up yields, which, combined with the Federal Reserve’s signal that it will hold interest rates steady for the time being, is boosting term premiums. In Europe, a still-accommodative policy is bolstering inflation prospects, adding to the upward pressure on the gauge.
“Term premium was extremely depressed due to trade uncertainty, Brexit and you name it,” said Roberto Perli, a partner at Cornerstone Macro LLC. “These risks have abated so there is room for about a 50 basis point move higher in term premium. And given the Federal Reserve is on hold — with no chance of lifting rates – there’s a lot of incentive for investors to take risk.”
Ten-year Treasury term premium has climbed about 42 basis points since the end of August, on track for the biggest three-month increase since 2016, according to the widely followed New York Fed ACM model created by Tobias Adrian, Richard Crump and Emanuel Moench. It rebounded this week to as little as minus 0.84% — from a record low of minus 1.29% in August, the least for NY Fed data provided back back through 1961.
Understanding the trend in term premium isn’t just an academic exercise for bond wonks as it also helps gauge what’s driving debt yields and valuations. That margin of safety is one of three components that make up the yield of any given bond, according to former Fed Chairman Ben S. Bernanke — the other two being market expectations for monetary policy and inflation. Basically, it’s an extra cushion against risk over the security’s relatively long lifetime.
To be sure, a resolution to the U.S.-China trade spat still looks far, with President Donald Trump downplaying Friday the amount of progress made in negotiations.
In Germany, the 10-year term premium began a swoon in mid-2014 after ranging from 100 to 250 basis points back since the euro was introduced in 1999, according to estimates by UniCredit SpA strategist Luca Cazzulani, using the methods as in the ACM model.
The gauge for bunds slumped to a record minus 100 basis points at the end of September before rising to minus 88 in October, according to UniCredit data updated at the end of each month. It has likely risen further this month.
“We have seen a continuation of upward in bund yields this month, and that should be related mostly to higher term premium,” Cazzulani said.
Long-term debt has a higher duration that those with shorter tenors. That means that for each move up in yield, prices will fall more sharply than for its short-term counterparts, increasing the risk of being in long-maturity debt.