You may be surprised to learn that the first round of the French Election affected US mortgage interest rates. If you’re looking to buy or refinance a house soon, understanding how these broader market factors influence one another may just play into your personal financial decision-making.
Recap: Round 1 of The French Election
For those of you who missed it, the first round of the French election happened on Sunday, April 23, 2017. Because no candidate won a majority in round 1, the top two candidates, Emmanuel Macron and Marine Le Pen, will face off on May 7. Macron is a centrist committed to free markets and global trades while Le Pen of the National Front is a far-right populist vowing to exit the European Union (EU) and suspend immigration.
According to polling on April 26, 2017, Macron is expected to win over 60% of votes and become the next President of France. The results and current predictions left investors across the globe relieved on the morning of Monday, April 24 as we saw stocks advancing and safe-haven assets, such as US Treasuries and gold, retreating. We also saw mortgage rates rise slightly here at Clara on Monday morning — about ⅛ of a point on a 30 year fixed rate. Which raises the question, how are all these things related and, as a prospective homebuyer or homeowner in the US, what should I be watching for on May 7th?
What’s the French Election Got to Do with US Mortgage Rates?
Let’s take a step back. Most people think the government sets mortgage interests rates. It does not. Instead, markets influence mortgage interest rates constantly. So seemingly far away events, like the French elections, could actually influence things like the interest rate on your mortgage.Here is a high-level explanation as to how the markets influence mortgage interest rates.
Imagine a spectrum with more risky assets, like stocks, on one end and less risky assets, like US Treasury bonds, on the other end.
Now, let’s place mortgage-backed securities (MBS) on this spectrum. Specifically, US Agency MBS (as opposed to Non-Qualified Mortgage products), as Agency MBS bonds ultimately determine mortgage rates.
On the risk spectrum, US Agency MBS sit very close to US Treasury bonds since their principal and interest cash flows are guaranteed by federal agencies under government conservatorship. In other words, if borrowers default on their payments, Fannie and Freddie backed by Uncle Sam have promised to pick up the tabs.
When the market is volatile, investors tend to shy away from uncertainties and seek safer assets offering lower returns – like US Treasuries or US Agency MBS. The surge in demand for these bonds drives their prices up. Because bond prices and yields are inversely related, we tend to witness lower Treasury yields when investors seek safe haven assets. This can also pull down mortgage interest rates. If mortgage rates are lower, people can generally better afford houses when buying or can refinance to lower rates and possibly have more of their paycheck to spend on things other than their monthly mortgage payments. And voila, you now have a very simplistic grasp of how a vote in France can influence your pocketbook at home.
The Take-Away: All Ships Tend to Rise with Stability
If Macron becomes the next French President, US mortgage interest rates may very well stay stable, since that expectation is priced into the market. If Le Pen were to win, we could witness a drop in rates like we saw after Brexit, when the UK voted to leave the European Union, because Le Pen has vowed to do the same. That would mean, here in the US, future and current homeowners might be able to see mortgage rates dip below 4% again. This could be a short-term silver lining for some, but generally, homeowners and homebuyers alike are better off in the long term with financial market stability. So you may not want to root for EU dissolution even if it means shaving a bit off your mortgage interest rate.
Update: Macron won as predicted. US mortgage rates remained relatively stable.