The markets are trying to digest this morning’s announcement from the European Central Bank that they will be purchasing assets valued at $60 billion euros per month until September of 2016. As expected, this has created a great deal of volatility in the US stock and bond markets this morning. Investors are trying to determine if this will create a long term push lower in the European bond markets, or if this will have the opposite impact to interest rates as Quantitative Easing did here in the US. In fact, mortgage rates were lower when QE started than where they were at the end. This struggle will add increased volatility in the near term as we watch and see how bond prices respond.
Oil prices are hovering in the near mid $40’s per barrel. However, prices are showing signs of a reversal higher. It seems likely we may see a bit of a drop lower before prices reverse course. We wouldn’t be surprised to see a move happen sometime in the month of February. When prices do move higher, this will not only hurt us at the gas pump, it will also put upward pressure on mortgage interest rates. The price of oil has dropped more than 50% since August of 2014. This has only happened five times in history. Six months after those events, the stock market took a nice jump higher in four of the five times. This further pressures mortgage interest rates higher, making now a good opportunity to take advantage of the low rates available.
With today’s announcement from the EU creating massive volatility, it remains a good time to lock in an interest rate. Bonds are trading in a wide range and moving from one extreme to another. This level of volatility is not normal and can lead to rapid losses. We are no longer in a downward moving interest rate channel. Therefore, be careful.