Interest rates soar on Trump victory

The short-term reaction to Trump’s victory was a massive selloff in bonds causing interest rates to soar. Will this be the start of an alarming new trend for mortgage rates?

donald-trump-election-caricatures-582450ec49347__700The financial media ascribes gyrations in the financial markets to current news events, mostly with no correlation at all. However, occasionally, developments in world affairs really cause the financial markets to react, and the election of Donald Trump prompted bondholders to sell in a panic, resulting in an interest rate spike.

The stage was set for rising interest rates years ago when the Federal Reserve announced the beginning of a cycle of tightening monetary policy. Just the announcement caused mortgage interest rates to rise from 3.5% to 4.5% in about six weeks during 2013. Since then mortgage rates drifted back down near record lows, and the Federal Reserve only raised interest rates once — and only by a token quarter percent.

Most people expect the Federal Reserve to raise rates again in December, but until early last week, the bond market held strong. Many people believed the bond market was a bubble in search of a pin, and the election of Donald Trump provided it. But why would markets react this way to a Trump presidency?

Democrats will surely argue that their fiscal restraint and conservatism kept bond investors at peace about long-term inflation. The prospect of a Hillary Clinton presidency harkened back to her husband’s presidency — the last time the federal government balanced its budget and ran a surplus.

Republicans will surely argue that Trump’s election sparked inflation concerns because the policies of the political right Trump will enact will cause such an increase in economic prosperity that investors wanted to own stocks rather than bonds to capture future profits. Interest rates will need to rise to keep a lid on growth because the economy will be stronger under Republican rule.

With Trump win comes expectations for interest rates to rise ‘bigly’

By RACHEL KONING BEALS, Published: Nov 11, 2016

Trump’s economic plan implies increased fiscal spending, reduced regulation, especially a potentially major reversal of financial-services rules post-crisis, a change of Fed leadership and increased trade protectionism, wrote Deutsche Bank analysts, in a research note they titled “Bigly rates repricing.”

If those policies bear fruit, it could be bullish the economy and stocks, but it could complicate interest-rate policy or invite unexpected inflation.

“Trump’s victory is fundamentally bearish fixed-income from a pure economics perspective,” said Deutsche Bank strategist Francis Yared and team, in the note.


Let’s be realistic and admit there is no way for Trump to follow through on the many things he said in the campaign. His entire campaign was full of bluster and telling people what they wanted to hear, and right now everyone expects Trump to follow through on the campaign promises they selectively heard. It isn’t going to happen.

Trump must choose which of his conflicting campaign promises he will attempt to make good on. He told working-class Americans he would invest billions in infrastructure, and in the process put a lot of people to work and pump the economy full of money. Obama said the same in 2009, and he did approve a massive spending bill. However, he was criticized by the left for not stimulating enough, and he was criticized by the right for running up huge deficits.

If Trump makes good on his promise, the Democrats will only offer light resistance as the Republicans attempt to concentrate the pork in their districts. The Tea Party faction of the Republicans will resist, and Ted Cruz will openly oppose Trump, but their power is waning, and Trump’s power is waxing. Passing another spending bill the size of Obama’s would fracture the Republican party and require bi-partisan support. Despite the challenges, I think he will succeed with this one.

Trump also told Republican elites that he would cut taxes. Personally, I believe this was token lip service and he won’t push very hard on this because he knows it will run up the deficit. Plus, he owes nothing to establishment Republicans who opposed him. His working-class supporters won’t lose faith if he fails to give millionaires massive handouts.

But let’s assume he pushes tax cuts through Congress with no bi-partisan support past an inevitable Democratic filibuster. What would happen? Does anyone really believe the economy will grow so much as to recoup the lost revenue from the tax cuts? Realistically, this would cause the deficit to rise again just like it did under George Bush, who squandered the Clinton surplus on the same flawed premise.


What Trump does here matters because it will impact the bond market, interest rates, and housing affordability. The initial reaction of the market is to believe he will succeed in keeping both promises, which would run up a deficit and lead to inflation. When the bond market senses inflation, they abandon the long-end of the yield curve which drives up rates for long-duration debt like mortgages. This translates to higher mortgage rates and reduced home affordability.

Many in the real estate and mortgage industries wanted Trump to win because they believed he would overturn Dodd-Frank, a law they perceive as inhibiting their ability to close deals. I doubt they considered the possibility that electing him would cause mortgage rates to rise suddenly, choking off their refinance business and ultimately leading to slower home sales.

A Trump market reaction just made housing more expensive

Diana Olick, Thursday, 10 Nov 2016

Call it a grand irony. Donald Trump rode to victory on an electorate looking for a better economy and a better standard of living, but the financial market reaction caused a huge spike in mortgage interest rates. That just threw a big wrench into affordability for homebuyers.

Financial markets react to unforeseen events with volatility. New and unexpected information must be digested by investors, and they don’t know which way to go. For example, stock market futures traded down over 800 points Tuesday night, but Wednesday saw a huge rise in stock prices.cxgdslgxuae0uv3

Nobody has any idea how this will shake out, but since the bond bubble was due to deflate eventually, this may be the catalyst for a sustained move — or not. Only time will tell.

If mortgage rates move back up to 4.5%, home sales in California will be abysmal next year, and prices will come under pressure. The same will be true on both coasts, but since the coastal population centers didn’t elect Trump, I rather doubt he cares what happens to the housing markets in New York or California. Flyover country, Donald Trump’s base, will be largely unaffected.

Investors piled into the U.S. stock market post-election and pulled out of bond markets, causing bond yields to surge. Mortgage rates loosely follow the yield on the 10-year Treasury.

In turn, the average contract interest rate on the popular 30-year fixed loan jumped a quarter of a percentage point in the last two days, from 3.60 percent to 3.85 percent according to Mortgage News Daily.

“Even I was surprised to see how quickly lenders pulled back today. Different lenders have moved by different amounts, but on average, the 2 day total is 0.25 percent!” said Matthew Graham, chief operating officer of Mortgage News Daily.

It got even worse on Friday.

Housing affordability has already been weakening, thanks to fast-rising home prices.

Affordability problems keep back sales and limit home price appreciation. Sales were much weaker in San Francisco this year as the insanity reached a high point where buyers simply couldn’t push prices any higher, at least not without another infusion of venture capital welfare. A sudden and sustained rise in mortgage rates will further weaken sales in these already foundering markets.

I heard a co-worker lament that Trump would repeal Dodd-Frank and let the affordability product Genie out of the bottle once again. Many others in the industry rejoice at the prospect of increasing their short-term income irrespective of the long-term consequences. If Dodd-Frank is weakened in such a way as to remove the projections against future housing bubbles, it will make the housing market more interesting to write about — and a great deal more dangerous.