Interest rates, across the board, have actually been spiking since the announcement of the QE2 (Quantitative Easing) program on November 3.
Is the Fed more or less powerless to lower rates? QE2 was really not designed to drive rates down from prevailing levels but merely to “accommodate” the fiscal deficit and prevent a rise in rates that would otherwise occur due to crowding out and other effects.
10-Year US Treasury yields (TNX) have risen since the announcement of QE2, municipal bond yields have spiked, corporate bond yields have risen, and mortgage rates have spiked. Indeed, overall, interest rates across the board are actually higher than they were before financial markets began to discount the prospect of QE2.
Having said that, it’s important to note that although rates have risen, they are still well below levels that could jeopardize the economic recovery. The question is what happens next.
In the short term, a few issues need to be monitored. For starters, investors should be aware of the fact that the crisis in Europe is actually “bailing out” the US in some sense. In the global competition for capital, troubles in Europe make the US seem like a relative safe haven thereby facilitating the financing of the US fiscal deficit. Furthermore, troubles in Europe will tend to depress global growth expectations and ease fears of commodity-driven inflation. Thus, the situation in Europe will be a key driver in US interest rate dynamics.
Second, any whiff of accelerating inflation in the US could have a dramatic impact on the bond markets. Again, developments in global commodities markets are key in this regard.
Finally, at some point, investor scrutiny is going to be turned toward congressional and presidential action with respect to the US fiscal deficit and sovereign debt fundamentals. The news of the failure of the presidential deficit commission to garner the necessary votes to issue an official recommendation is a worrisome development in this regard.
Conclusion
US interest rates are supposed to be falling, not rising. At least that’s what we were led to believe a few months ago when market consensus was excited about QE2 and the Fed’s power to stimulate the economy.
This sense that the Fed has lost control of interest rate dynamics could add an important element of uncertainty into financial markets in the coming months.
This is particularly important in a context in which investors generally are over-exposed to bonds.
Now that the President has extended the tax cuts and unemployment benefits, a long bear market in US bonds has already begun. Bad news out of Europe is probably the only factor that will be able to sporadically arrest the upward assent of US interest rates in the coming weeks and months.
I believe that US bond rallies due to instability in Europe should be utilized to initiate short positions in various categories of US bonds.
So what does this all mean to the consumer? Right now rates are still pretty low and now would be the time to take advantage of them if you are sitting on the fence. If you are contemplating on making a purchase or refinance, you may want to consult with a mortgage professional to perform an analysis that outlines everything in terms of rate and costs over time (depending on how long you plan on keeping the mortgage).
You at least owe it to yourself to take that step. What do you have to lose? Or more importantly, what do you have to gain?
Until next time…
Geoffrey Bolen
Your Mortgage Advisor For Life
Primary Residential Mortgage, Inc.
Phone: 301-588-4701 x84 | Fax: 301-588-4709
Email: gbolen@primeres.com
P.S. It’s my intentions to continue building lifelong relationships one client at a time and remain your personal mortgage advisor for life. If you know of a friend, family member, or coworker who is looking for financial options, either through purchasing or refinancing a home, don’t keep me a secret. Be sure to call or send me an e-mail, I know someone. Your referrals are the greatest compliment I can receive.
Why have mortgage rates dropped so much? Especially after the FED had removed their stimulus back in the end of March. That’s a very good question. All of the analysts and the media and even some of us in the industry had predicted that interest rates would go up. Instead the opposite had occurred. Here’s what happened. Europe had much concern in the growing amount of debt, the country Greece was facing. So much so that if the country would not meet its obligations, it would have had a devastating effect to the European economy. 