The Treasury has been going to town printing money...clear proof we are "already out of money". The Treasury has literally been printing money at a record pace by way of Treasury auctions to pay for the massive spending. How does that impact those attractive home loan rates you once were hearing about? Let's break it down.
It's back to school with Economics 101. Supply and Demand. For months, our government has been trying to right the economy with various stimulus and bail out plans. These plans cost money...money we don't have. So how do we pay for it? The US prints money so to speak by issuing Bonds which are purchased by investors.
And these hundreds of Billions of dollars of new Bond SUPPLY have to be absorbed by the market, so the additional supply literally weighs on the entire Bond market (Treasury Bonds and Mortgage Bonds) and drags prices lower. Lower prices means higher home loan rates.
Also, when you think of supply, consider all the tons of refinances recently - and all those loans have been bundled, packaged and sold on Wall Street...and this additional SUPPLY has now started to hit the secondary market as those closed loans are now getting turned around and sold. This supply also must be absorbed.
The Fed recently became a large purchaser of Bonds in an effort to help shore up the housing market and keep home loan rates low. In January they made a commitment to invest $500B in Mortgage Backed Securities (aka Mortgage Bonds) over the six month period, ending June 30th. on March 18, they expanded that commitment by another $750B bringing the grand total to 1.25 Trillion and extended the time frame thru the end of 2009, possibly into 2010.
While the Fed has been a buyer, they simply can't buy enough to balance all the selling...or all the new paper they are auctioning off to pay for the stimulus and bailout packages. Anytime supply vastly exceeds demand prices will move lower. And as prices move lower, yields rise - that rise in yield will attract new buyers as they get a higher return on their investment. This is how the market finds balance. It's like a see-saw.
More is coming...more Bond supply...as next week brings another enormous round of Bond auctions with three separate auctions scheduled to take place. Seeing how badly Bond pricing behaved during last week's round it would seem Traders are likely getting very jittery thinking about how the Bond market will react leading up to and during these events. It can't be good news for home loan rates either.
Since falling thru important support levels on May 26, Mortgage Bonds have lost 256 points driving home loan rates solidly above 5%. While we've had a few weak attempts to improve, the supply continues to weigh heavily on the market. It could be tough from here to get much better.
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