30 year fixed rates are headed higher this week and most everyone, traders and economists alike, believe it will continue even higher. Why?
The 10 year Treasury (which is what 30 year fixed rates follow) has had a rough go of it. People have just stopped buying the poor thing – and that is bad news for mortgage rates.
Remember that the price and yield on a bond move inversely. As the price goes up, the yield drops (and 30 year fixed rates drop). What makes the price go up you say? Buyers. Old school Econ 101. The more people want to buy something, the higher the price goes. But people have stopped buying. The price has been dropping and the yields have been increasing – so up go the rates.
Why have people stopped buying? And what will this mean for mortgage rates and for you?
First, investors have stopped buying. Inflation erodes the value of bonds in general but inflation really erodes longer term bonds like the 10 year. In fact, usually a whiff of inflation in the air will send bond buyers fleeing for the exits. These days, we have had more than a whiff – we have a full blown stench. Commodities rallied this week. Oil surged past $135. Food prices, copper, energy – all higher.
Second, foreigners stopped buying. The Bank of Japan used to buy bunches and bunches. They wanted to shore up the strength of the dollar because they did not want their exports to cost too much. But most foreigners – individuals, banks and sovereign wealth funds – have all the greenbacks they want. They are starting to see other investments in more favorable light.
Third, the government might have to sell more of them to make up for the lower tax revenues in this economic slump. Normally, mamma Fed has been raking in some good cash from all of the tax payers. Of course even with the tax revenue it did not stop the government from selling Treasurys (meaning borrowing from all of us and the world). But these days? They are really going to use that ATM in the sky called US Treasurys in order to feed their appetites. Back to Econ 101. If you increase the supply – the price drops more.
Fourth, the dollar is loosing its golden child status. Its value has been on a long painful skid against the other world currencies. This makes oil more expensive (which is traded in dollars). It exports inflation to the world at the same time as exporting economic sluggishness. After all, for years Americans bought anything the world made – and the world loved to sell it to us. But these days, stuff the world makes is a little more expensive to the average American. That is not good for the growth of foreign economies.
We look for 30 year fixed rates to surge into the mid 6’s by the fall – and jet right on past the mark by 1st quarter 2009.
