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Mortgage Rates Forced Lower by QE4 and Global Bond Markets

A fourth round of Quantitative Easing by the Federal Reserve? Yes, there is another round of easing already happening that is forcing mortgage rates lower but the Federal Reserve doesn't have anything to do with it. The easing comes in the form of lower oil prices.

You have heard about lower oil prices in the news and have seen sharply lower gas prices at the pump. The price per barrel of oil has fallen from over $100 a barrel last summer to $48 a barrel today. The plunge in oil, other commodity prices, and equity markets has forced investors to flee to the safety of U.S. Treasuries.

10 year U.S. Treasury yields, which were forecast to be around 3.00 percent during this stage of the economic recovery, have fallen back under 2.00 percent this month. The decline in Treasury yields has forced 30 year mortgage rates down near the all-time lows of spring 2013.

10 year bond yields are trading at 1.80 percent and 30 year mortgage rates today are averaging 3.85 percent. About a year ago, 30 year mortgage rates were forecast to be above 5.00 percent by this time. The average 30 year rate is at 3.85 percent but on our rate tables we have lenders quoting 30 year refinance rates as low as 3.25 percent in some states.

There is also another factor at play forcing U.S. bond yields lower - a truly global market for sovereign bonds. 10 year U.S. bonds are only yielding 1.80 percent right now but that is considerably higher than current Japanese and German bond yields. 10 year Japanese bond yields are at 0.25 percent and 10 year German bonds are yielding 0.41 percent.

Investors are flocking to the higher yields U.S. bonds offered and a strong dollar is enhancing their returns. Investors buying bonds drive bond prices higher and as a result, drive yields lower. Lenders peg mortgage rates to bond yields so mortgage rates also move lower.

History has taught us that eventually the Fed will take the punch bowl away by increasing the fed funds rate. The likelihood of this happening sometime is year is almost certain but the question is when. We look for an increase in the fed funds rate sometime in the summer of 2015.

A higher fed funds rate will force bank deposit rates, bond yields and mortgage rates higher. Be sure to position your finances for the upcoming increase in rates in 2015.
Author: Brian McKay
January 16th, 2015