Government Debt Not Hurting Residential Mortgage Rates

July 14th, 2010

Despite the official United States debt now topping $13 trillion, new debt issued by the Treasury Department is being highly sought after by investors. This is helping counter fears of debt market over-saturation with US debt, and is pushing interest rates lower as domestic and foreign investors keep buying long-term US debt. While there may be longer-term ramifications to US debt levels, for now the net effect has been consistently very low rates for American consumers.

Use a free mortgage calculator to plan your summer home purchase or mortgage refinance, and take advantage of continued low rates.

US Treasury Auctions

On July 14, 2010, the US Treasury auctioned $13 billion of 30-year bonds, meeting positive reactions, and beneficial rates, from investors. Finishing a relatively light week in federal borrowing, the sale completed a recent cumulative $64 billion in notes and bonds from the Treasury to finance US federal spending. Earlier in the week, the Treasury sold 10- and 3-year notes to investors.

Since early April 2010, when several European countries experienced government debt crises and put tremendous strain on the European banking system, investors have been snapping up US Treasury debt in the form of T-bills, notes and bonds. In spite of growing international skepticism at times, US government debt is apparently currently seen as one of the safest investments in the world–and when investors and foreign nations become nervous about the markets right now, they seem to ‘buy American.’

As long as US debt is valued so highly, you can likely continue to assume that historically low mortgages rates will persist for use with your free mortgage refinance calculator.

Flight To Quality

When investors get nervous, they undergo what is known in finance-speak as a “flight to quality.” Like a race to high ground during a flood, in a financial crisis, investors want a safe place to park their assets. Longer-term debt instruments such as bonds are often considered safe in this respect. As more investors buy bonds, the prices are bid up, and as the prices increase, the yields, or interest rates paid on that debt, go down.

The flight to quality pattern is partly why interest rates often drop when the stock market drops. Picture two kids on a teeter-totter: One is named Price, and the other is named Rate; as Price drops, Rate climbs, and as Prices rises, Rate drops. In the economy, this is because investors pull money out of stocks to purchase bonds, driving stock prices lower, then as more money flows into bonds, bond prices are bid up and interest rates decline. Eventually, as confidence in stocks returns, investors will sell bonds to purchase stocks, causing bond sales and prices to decline, and bond rates and stock market prices to rise once again.

If you are considering locking in a low mortgage rate and feel the stock market should be rising for awhile, chances are you should execute the rate lock in order to avoid the eventual rate increase.

But What Does US Debt Have To Do With My Mortgage?

Individual mortgages are grouped together as mortgage-backed securities (MBS), then bought and sold between lenders and investors on the so-called ’secondary market.’ Your mortgage is most likely a 30-year mortgage, and is most likely currently owned by one of the government-sponsored enterprises (GSEs) extant to help provide domestic mortgage market liquidity (i.e., Fannie Mae, Freddie Mac, or Ginnie Mae).

When your mortgage is sold by your lender and bundled for sale as an MBS to one of the GSEs or another investor, it becomes an investment instrument, essentially promising your future mortgage payments in return for upfront funding of your mortgage. Once bundled and for sale on the open market, these MBSs compete with 30-year or 10-year long-term U.S. Treasury bonds, as well as other long-term debt instruments such as corporate or municipal bonds, for investor cash. Because US government-backed bonds are usually considered lower risk, the MBSs and other bonds must be priced higher to compensate investors accordingly. Still, prices and yields on long-term bonds generally move in tandem due to their mutual competition, so when sales of US debt go well, so do sales of Fannie and Freddie MBSs.

So, despite the abundance of US long-term debt being being sold by the US Treasury Department, and competition with GSE MBSs, the domestic and international economies are such that a “flight to quality” has helped keep mortgage interest rates low.

Economic News

Every Friday on this site, economic news and data is posted to inform you about the direction of the economy and mortgage rates. If economic news is neutral or negative, it generally encourages investors to replace stocks with bonds for three reasons:

A free mortgage calculator can help you define a specific payment, forecast savings from refinancing, or interpret other mortgage criteria, but cannot predict your mortgage rate. Regularly referencing this column about news in the economy can help you determine where mortgage rates are likely headed, to help you better plan your mortgage application and closing process.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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