Mortgage Rates Affected By US Debt Rating

April 15th, 2010

Basic investing theory holds that the greater the risk, the greater the expected return. What happens when the safest investments–US Treasuries–are considered a greater risk?

And how would that affect your mortgage rate?

Moody’s Warns About Interest Rates

Recently, Moody’s Investor Services, who rates and grades bonds and debt issued by governments, warned that the four highest rated countries with the coveted Aaa ratings, or triple-A, were getting closer to having their debt downgraded. The four countries are the United States, United Kingdom, France, and Germany.

Because of its rapidly increasing debt and no plans in place to reduce spending and curtail debt, the United States is on the path to seeing its bond rating reduced by Moody’s within three years. A reduced bond rating from Moody’s will result in the US having to pay higher interest rates to investors who purchase Treasury bonds that finance America’s government.

Your Mortgage Competes with US Debt

When you are funded for a mortgage, that mortgage becomes someone’s investment. The interest you pay on the mortgage is interest someone else receives. Because it is an investment, the mortgage competes against other investments to attract investors.

The benchmark investments against which other bonds and long-term investments, such as mortgages, are measured are United States Treasury notes and bonds. If interest rates on Treasury bonds increase, so too will the interest rates on other investments, including mortgage rates. It would be the foolish investor who would expect a lower rate of return, or interest rate, on an investment in mortgages than the interest rate he would receive from the US government. The reason why US government debt is considered so safe is that the government can issue more debt–or print money–to pay its bonds’ interest and face value.

Mortgage Rates Affected by Amount of US Debt

The increasing supply of US debt on the international markets has a double impact on mortgage rates for refinances and home purchases.

While you may continue to see low mortgage rates for your refinance or purchase mortgage, the signal being sent by Moody’s with their caution on government bond ratings is that the period of low interest rates cannot be sustained. The general consensus is not whether interest rates will rise in the coming months and years but rather when they will rise… and by how much.

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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