We have been reminded recently that U.S. economic news is not the only reason rates move. Geopolitical turmoil can move them more. But still, it is important to consider our Federal Reserve’s roll in rates, and why rates fall even as Feds raise interest rates.
When we hear “Feds are raising the rates,” we wonder how much the cost of purchasing will increase. With that said, mortgage rates have come back down to where they were late last year. Why? The answer our Mortgage Advisors give their borrowers is simple: There isn’t just one interest rate that governs the entire economy.
The Federal Reserve sets an ultra-short-term rate called the federal funds rate, which determines how expensive it is for banks to lend money to each other on overnight transactions. This, in turn, helps determine how much interest you’ll be charged on, say, your credit cards.
Mortgage rates, on the other hand, are influenced by the yield 10-year U.S. Treasury notes which the Feds do not have direct control over. When investors buy long-term Treasury debt (a haven for global investors to park their cash), prices on 10- and 30-year Treasuries rise while their yields fall (bond prices and yields have an inverse relationship). And when long-dated Treasury yields fall, mortgage rates also tend to drop. Mortgage rates tell us about what’s going on in the bond market, and how investors feel about what’s going on in the economy.
After President Trump’s victory last fall, and Republicans controlling both chambers of Congress, the GOP agenda of lowering taxes, cutting regulations, and increasing infrastructure spending would boost economic growth, right? Most investors sold safe government bonds causing Treasury prices to fall and yields to rise, while they loaded up on stocks, which would stand to gain if economic activity took off.
But political, personal, and geopolitical controversy have dominated the news, and politicians’ agendas. The Affordable Care Act repeal failure was a setback, and it is believed that the Administration will have trouble advancing economic goals. Uncertainty again rules the economy, and now we have the damage from the hurricane and tropical storm in Texas.
Uncertainty and slow growth are great news for bond prices. As a result, the yield on the 10-year Treasury has sunk from as high as 2.62% in March to a recent low of 2.13%. It is currently around 2.25%. That means your mortgage rates will stay near historical lows, a boon to first-time homebuyers (if they can find a house for sale in their price range) and homeowners looking to refinance.
While Opes Advisors, a division of Flagstar Bank, Member FDIC, uses all reasonable efforts to ensure that this information is current, accurate and complete on the date of publication, no representations or warranties are made (express or implied) as to the reliability, accuracy or completeness of such information. Opes Advisors, a division of Flagstar Bank, Member FDIC, therefore, cannot be held liable for any loss arising or indirectly from the use of, or any action taken in reliance on, any information appearing in this email.