Lower Rates Aren’t In The Bag

June 24, 2009 · Dean Rizzi

Last week’s drop in mortgage rates was a welcome relief, and you would think that more relief should be forthcoming. After all, inflation appears to be a dead issue, given recent data on producer and consumer prices. Inflation and interest rates are highly correlated: When one falls, the other usually falls in tandem.

But there is more to the story than inflation. All interest rates are determined relative to risk-free market interest rates, with short-term Treasury bills serving as a proxy. But most interest rates are not risk-free. Mortgages rates are certainly not risk-free, which is why they are higher than Treasury bill rates. What’s more, mortgage rates are heavily influenced by rates on mortgage-backed securities (MBS). MBS rates, in turn, are heavily influenced by yields on Treasury bills, notes, and bonds.

And there is the rub. Treasury securities prices tumbled last week after the government announced $104 billion in debt auctions. As rates on Treasury securities increase to attract buyers, there is a crowding out effect, because Treasuries compete with other debt instruments for buyers. If Treasury securities must raise their yields to attract buyers (which happened last week), then so do most other debt securities; hence, a possible increase in mortgage rates.

We can’t be sure what impact this crowding effect will have. Rates could go higher, but they could go lower too, particularly if the Federal Reserve continues to implement its $300-billion program to create demand and keep a lid on rising rates. But why chance it? Thirty-year fixed-rate loans averaging between 5.5% to 5.75% are still a very good deal, as are the deals found on most existing and new homes on the market.

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Tags: inflation, Interest rate, loans, mortage rates, mortgage, San Bruno

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Comments

4 Responses to “Lower Rates Aren’t In The Bag”

Larry Franzella on June 24th, 2009 12:59 pm

That is the bottom line – rates are still fantastic, why chance losing the opportunity!

Larry Franzella
Shokoofeh Nowbakht on June 24th, 2009 8:49 pm

The thirty-year fixed rate of below 3% a while ago was just amazing, but I agree 5.5% is still better than many existing over 6% rates. I should know, I’m paying 6.25% now!!!
Shokoo
Brian Boisson on June 25th, 2009 8:57 am

Dean,

Your analysis’ are always enlightening!

I agree rates in the 5-6% range are incredible and are a great opportunity!

Brian
Jean Joh on June 25th, 2009 1:09 pm

Thanks for the blog. So many people I meet ask me to give my prediction on what interest rates will do in the near future. I always try to remind them of the bigger picture – that regardless of the small ups and downs, interest rates are still amazingly low.