US homeowners are rushing to refinance their mortgages, taking advantage of a drop in borrowing costs triggered by lingering trade tensions and growth concerns that have fuelled a global bond rally.
Applications to refinance home loans rose 47 per cent for the week to June 7, according to an index from the Mortgage Bankers Association, reaching levels last seen in November 2016, shortly before the Federal Reserve increased its pace of interest rate increases, pushing mortgage borrowing costs higher.
Low borrowing costs also lured home buyers, with the MBA’s purchase index rising 10 per cent on a seasonally adjusted basis from the week before.
The rise in mortgage applications comes as the average interest on a 30-year fixed rate mortgage has fallen from 4.42 per cent at the beginning of May, when trade tensions began to escalate, to 4.12 per cent in the latest MBA data. According to Freddie Mac, the government-sponsored mortgage finance company, the 30-year fixed rate stood at 3.82 per cent for the week ending June 6.
The US trade offensive has amplified concerns about weakening economic growth, fuelling a global bond rally and dragging benchmark sovereign bond yields lower.
The 10-year Treasury yield has fallen 36 basis points to 2.14 per cent since the start of May.
Weak jobs growth is also weighing on sentiment, raising expectations that the Fed will cut interest rates to help prop up financial markets.
The likelihood of a quarter-point cut in interest rates when the Fed meets in July stands at 76 per cent, according to probabilities derived from futures prices.
“Mortgage rates for all loan types fell by a sizeable margin for the second straight week, pulled down by trade tensions with China and Mexico, the financial markets reacting to more bearish communication from several Fed officials, and weaker than expected hiring in May,” said Joel Kan, associate vice-president of economic and industry forecasting at the MBA.
“Despite the less positive outlook, both purchase and refinance applications surged, driven mainly by these lower rates.”
But Mr Kan added that there were still signs of caution among home buyers, as refinancings rose to account for almost 50 per cent of total applications, from just above 42 per cent for the previous week.
“Demand is still relatively strong, but there is likely some restraint from prospective buyers, driven by some economic uncertainty,” he said.
Often when refinancing volumes surge, mortgage investors seek to replace the lost income from the early repayment by buying up Treasuries and interest rate swaps, further exacerbating the move lower in bond yields.
But analysts and investors said that such hedging activity had not yet dramatically increased and had not contributed significantly to the decline in Treasury yields.
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