What In The World Are Interest Rates Doing?
In the past 3 days we have seen interest rates on the 30 year fixed go from 4.875% to 6.0%! What the heck just happened you ask? The last three days of interest rate hikes were nearly entirely due to a decrease in demand for treasure securities shown by the lackluster treasury auction.
Why would treasury demand decrease? For those who keep in touch with me, I'm sure you've already heard my rambling about China, the trade deficit and the U.S. Treasuries relationship. But here I go again anyway. As our trade deficit has exploded over the past decade from less than -$10 billion/month to over -$60 billion/month, China has been buying a significant amount of U.S. treasury securities to compensate for that. The more exporting they do to the U.S., the more treasuries they buy. The less they export to the U.S., the less treasuries they buy. Since the end of 2008 to now, the U.S. has stopped consuming as much as before due to the recession in the economy. In turn, China has stopped exporting as much, in fact about half as much. The U.S. trade deficit just went from over -$60 billion/month to less than -$30 billion/month. Literally cut in half!
Is this a good thing for the economy? Yes, this is just what we need to bring the economy back to a stable operating level.
Is this good for mortgage interest rates? NO! This is terrible for interest rates. Mortgage interest rates are directly influenced by treasury yields. As demand weakens for U.S. treasuries, yields will continue to go up. Bonds 101: Bond prices and interest rates have an inverse relationship. As bond prices increase, rate decreases and vice versa.
When will rates go down back to where they were? When demand for treasuries increases again or there is some external force to influence rates down again. In my Pessimistic, lonely little humble opinion, we likely just saw mortgage interest rate lows for quite some time two days ago.
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