Interest Rates Signal Rise in Mortgage Rates

The answer is.... "interest rates"

For several months we have been warning borrowers about an imminent run-up in mortgage rates.  That time appears to be here.  Recent market activity has seen a steep increase in interest rates on ten year treasury bonds.  Treasuries briefly went over 4% yesterday before falling to just under 4% by the end of trading.  As recently as the beginning of March, the rate was as low as 3.6%.  The higher rate that the government must pay on debt issues will drive other interest rates higher, including mortgage rates.  This may have serious implications for borrowers and the economy as a whole.

There are differing viewpoints on the impetus behind rising rates.  One viewpoint says that as the economy grows, inflationary pressures will cause the Federal Reserve to raise the prime rate. In anticipation of higher rates in the future, long-term investors are demanding higher returns on treasuries today.  The Fed has committed to keeping rates low “for an extended period”, but in truth nobody knows how long that extended period is.  Speculation is widespread that there could be a rate hike before the end of the summer.  Most economists consider inflation to be of relatively little threat at the present time, but things can change quickly and inflation is the bogeyman that keeps bond investors up at night.

Another perspective is that as the economy improves companies will ramp up hiring efforts, which will in turn drive down the unemployment rate.  Last month jobs were created for the first time in three years, and while the unemployment rate stayed the same and may indeed rise as more unemployed attempt to rejoin the labor market, it will eventually fall if the trend of job creation continues.  Declining unemployment generally causes interest rates to rise. While unemployment is expected to stay high throughout the course of the year, this is another possible reason for investors to anticipate interest rate increases.

A third reason interest rates may be increasing is that investors are becoming confident enough in the economic recovery to start moving money away from government securities and into riskier assets in search of higher returns.  As demand for treasuries declines, returns on treasuries will increase.  Demand at treasury auctions last week was tepid, rates increased, and this is one possible reason why.

There is, however, a less optimistic viewpoint about what is happening to interest rates.  As the government deficit spending increases, the supply of bonds issued surpasses demand.  The government is forced to pay higher and higher levels of interest in order to get that debt financed.  There is an inherent risk in any type of lending, and government issues are no differnt.  Moody’s recently indicated that the United States could be downgraded from AAA rating if the government does not take steps to control its debt burden.  While not impending, Moody’s said that the “distance-to-downgrade” is “substantially diminished”.  Possibly investors who fear out-of-control government debt are demanding higher returns on bonds to compensate for the additional risk.

Whatever viewpoint you subscribe to, it appears that higher interest rates are here to stay.  I expect that rates will be north of 5.5% by the end of the year.  At Total Mortgage we offer some of the best rates in the country, and can help you lock a loan at a low rate now.  Don’t delay any longer, call us at 877-868-2509 for great rates and the best service.