By now most folks know that financial markets had a rocky return to work after Memorial Day. The Dow down 391 points (over 500 at one moment), and interest rates way down… something weird in Italy, and then other stuff…

Over the holiday weekend mortgage rates dropped almost a quarter-percent, 4.50% in reach again

Will rates fall more? Sometimes the table is set for deeper, but this time take the chicken in your hand!

I know, I know… “Why?” This rate drop has two central causes. First, the euro adopted in 1998 was an incredibly bad idea and will fall apart someday. Politics in Italy, Europe’s third-largest economy, suddenly make “someday” any day, now. But there is no way to know. The euro has been at the brink several times and then been saved. Second, just as global financial markets were in full panic on Tuesday morning, the White House dropped a tariff on China. Losses doubled, rates fell more.

The global move is a “flight to quality,” meaning a cash race to the safest place, U.S. Treasurys. The U.S. 10-year T-note one week ago traded at 3.06%; by the end of Tuesday, 2.78%. Frightened global money runs to Treasurys, not to mortgage-backed securities, so Treasurys have fallen farther than mortgages.

The Fed meets on June 13. The rate which it tightens and eases is the overnight cost of money — ultra-short term. The best indicator of future Fed action is the 2-year Treasury, and over the weekend it fell just as far as long-term rates. Don’t get excited: the Fed is not going to stop its hikes. The 2-year drop says that the Fed might not go as far next year as it would have.

It’s all about the economy. The euro coming unglued would not necessarily harm the U.S. economy at all. In historical experience, since these flights-to-quality push down U.S. interest rates, they often stimulate U.S. economic growth — another reason to take a drop like this and run. The prospect of trade war from tariffs on China or others is far more dangerous than the euro.

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