How many times can you claim that what has happened is an unintended consequence before it appears that it’s actually an intended consequence? This is a question that I have been pondering and was brought to a head this week as the U.S. Treasury notes and bonds sold off dramatically. The 10- year Treasury note, which was trading early Thursday at a yield of 3.17%, sold off Thursday afternoon as one rating agency announced that the U.S. debt instruments had been lowered from a Triple A rating. Moody's came out on Friday and refuted that, stating the U.S. Treasuries were still Triple A. Nevertheless, the Federal Reserve didn't increase their buying of the Treasuries and the 10 year finished the week at a yield of 3.44%. That is an increase of over 0.25% in a little over 24 hours. What does this mean to us and why should we care?
It means that those in this world who are buying our debt want higher interest rates to act as our banker. We will have the largest deficit in the history of the country and it needs to be financed. If the buyers want higher rates, our costs go up and this can lead to inflation, which affects all of us. From a purely selfish standpoint, this can also directly affect the mortgage rates we have in this country. We now have amazing low rates which are being used to stimulate the purchases of real estate and helping the turn around this core industry needed for economic revival. Rates are artificially low because of the $1.25 trillion being used by the Federal Reserve and the Treasury to buy mortgage backed securities, but eventually the money will be spent and rates will increase.
Could the movement of the bond market last week start a reversal of our plans prematurely and have the mortgage program end before it does its intended work? In other words, could an unintended consequence finish off an intended one? It just might happen.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.