What does Brexit mean for mortgage rates?

Friday’s bond market has opened sharply higher as the markets react to Britain’s vote. The opposite reaction of a bond rally often is weakness in stocks and we are seeing plenty of it this morning. The Dow and Nasdaq are currently down significantly. The bond market is currently up, which should improve today’s mortgage rates by approximately .375 of a discount point.

Well, the Brits did it. Surprising many in the financial world, Britain voted to break away from the European Union. That has caused turmoil in the global markets with stocks getting crushed in every relevant open exchange. This is great news for mortgage shoppers because scared stock investors usually shift funds into bonds for safety, hence the huge rally in U.S. bonds this morning. It also makes a Fed rate hike late next month highly unlikely. It also raises the possibility of them not acting the rest of the year.

There were two pieces of economic data posted this morning, but the Brexit news makes them irrelevant in today’s trading. May’s Durable Goods Orders was first at 8:30 AM ET. The Commerce Department announced a 2.2% drop in new orders for big-ticket products such as electronics, appliances and airplanes. Analysts were expecting to see a decline 0.6%, so the news is favorable to bonds and mortgage rates. Even a secondary reading that excludes more volatile transportation-related orders (such as airplanes) came in softer than expected. The acceptable variance in this report is wider than most others because the data is known to be quite volatile from month to month, but we can still consider the data good news.

Overall, enjoy today’s bond rally and downward move in rates. Some analysts are already downplaying the news and predicting it won’t have nearly an impact on the global economy as some are claiming. The future will tell us if today’s move was justified or if it was an overreaction. I believe the news is favorable for bonds, but am having a hard time justifying the reaction in the markets, especially when considering the recent downward spiral in bond yields leading up to it. That said, today is a good day for mortgage shoppers. However, please proceed cautiously if still floating an interest rate because the cause of the bond rally has come and gone. We won’t see the economic impact of Britain’s decision for some time. That allows plenty of time for profit-taking in bonds and a general correction.