I was listening to a financial talk show on the radio the other day; the host was going nuts over an upcoming Treasury auction where over $140 Billion in 2, 5, and 7 year notes were going to be auctioned. This would represent the most auctioned at one time ever, and would be on top of $60+ Billion in notes auctioned the week before.
This got me to thinking about how much debt was out there and ultimately where current mortgage rates were and what direction they were headed in. Here is what I found…
The State of Debt
In my search I ran across this very sobering set of statistics about who holds the most US debt… take a look at the data, and if you’re not concerned about where interest rates and inflation are heading, then you must be asleep.
Scary, scary stuff… and as one of the comments indicates; that last $4.75 Trillion is the Treasury printing money, buying its notes with the funny money and putting the funny money into the system. That ’s called monetizing your debt — just like borrowing from your credit card. We know it didn’t work for consumers… surely the Government is smarter that a bunch of uneducated consumers? NOT!
OK… what does all of this have to do with mortgage interest rates? Perhaps a lot.
The Impact on Mortgage Interest Rates
With all of these notes selling, I was extremely surprised to see that mortgage rates have been dropping from their summer highs of over 5.5% and are now hovering around 5%. And, many are predicting that these rates may hit historical lows by the end of the year. This really is great short term news, as it means home buyers are getting a double assist when purchasing a home today — low mortgage rates, mostly backed by the FHA, and the $8,000 first time homebuyer tax credit.
However, due to the high level of Treasury sales, most reasonable people would see that in order to get investors to continue to buy these bonds the yield is going to have to be increased, and the Fed may just have the answer. Assuming their appetite for funds doesn’t get in the way, the Fed plans to stop buying 10 year notes. If they in fact do this, they will remove themselves from the equation and the yield curve should start to trend upward from its current 3.5% position.
Since mortgage rates track to the yield curve and are usually separated by 1.5 basis points (mortgage rates higher then yield) in spite of what others may be predicting, we can expect mortgage rates to head higher and probably top the 6% mark later this year.
Will it happen?
While I am not a betting man… I can’t find a scenario where mortgage interest rates can stay at their current level. Plan accordingly.
Article Author:
Peter GiardiniPeter has written 11 articles for us.
Visit Peter's Website: http://www.theclubmastermind.com
Peter is an active and successful real estate investor in the Baltimore Maryland region for the past 8 years and is one of the founders of The Club Mastermind a real estate investing coaching program focused on local coaches helping investors to perfect their game.
Joshua Dorkin
Charles Feldman
Ted Karsch.
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Mortgage rates will definitely be trending up.
It’s amazing, how much Federal Reserve holds 6x as #2 on the list…
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Interesting analysis, Peter. I hope rates stay low until at least early next year, but there are lots of reasons why that probably won’t happen.
BTW – Love the CNBC link about the holders of US debt.
Josh,
There are so many indicators out there that point to increased mortgage rates. The FED is the big elephant in the room… if they decide that they want to keep mortgage rates low then of course all bets are off.
I think a lot depends on the economy… but if investors don’t anticipate the coming increases and make adjustments they are going to get hurt.
Agreed.