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S & P Cuts US Credit Outlook: Impact on Interest Rates?

Recently the credit ratings firm Standard and Poor's cut their credit outlook on the US to negative from stable and said it's AAA credit rating could be cut within two years if headway isn't made in closing the budget gap.

This credit outlook downgrade is a serious issue. The last thing the US wants to endure is an outright credit downgrade. This would make the interest expense on the US debt even more burdensome - and remember, we are all on the hook for this debt and the carrying costs!

What sparked the change in outlook? The S&P cited the wide political divide in Congress as a major hurdle to meaningfully lower the federal budget deficit. Both parties want to lower the deficit but there is stark disagreement on how to do it.

Hopefully, the S&P's actions will motivate Congress to get serious and get something done. If Congress doesn’t address the national debt ceiling limit by May 16^th, then this will increase volatility in the markets.

What does this mean for interest rates?

Mortgage Bonds are in tough spot longer-term. Here’s why: if the US government is successful in taking action to lower the budget deficit and avoid a outright credit downgrade, then we should expect a longer duration of accommodative Fed monetary policy. The Fed doesn't want an economic slowdown to recreate a "deflationary" environment. And if the economy slows, then we may start hearing debate for a QE3 Policy. We can see the negative effect on Bonds when QE2 was rolled out: it was inflationary. This will push rates higher.

On the other hand, if US debt receives an outright downgrade - that would be really bad for Bonds. One could expect a lot of belt tightening and slower economic growth in the future as government spending would have to slow immensely to help close the budget gap. Look at Greece’s current situation for a peek at this. This will push rates higher.

Rates remain historically low and may continue to do so for the near future. However, there are a lot of challenges for Bonds down the road and the recent credit outlook downgrade was just another example.

This makes for a increasingly vanishing opportunity for clients and prospective home buyers. Right now. Contact your mortgage professional to review your situation.

The US Treasury is "Locking" In at Present Rates – Are You?

BREAKING NEWS: The Treasury Department has recently announced that they are going to begin selling some of their massive holdings of Mortgage Backed Securities, to the tune of $10 Billion per month. They are saying that the reason is due to the stabilizing economy and market conditions being ripe for selling, and is not related to the current US "debt limit" issues. Maybe.

The Treasury acquired $142B in debt during the financial crisis – helping lower mortgage rates at the time. The news of this unloading process has immediately pushed Bond prices significantly lower, as Traders try to get their own positions sold. It's like musical chairs... no one wants to be the last one standing with a portfolio full of Mortgage Backed Securities.

With the news out of Japan improving overall, and no new developments from the Middle East, Bonds have been drifting lower in response, as the "safe-haven" trade continues to unwind. Should Stocks regain their footing after a couple of weeks of losses due to the "safe haven" trade to remove risk, we could see a continued move lower in Bonds.

Both of these developments will pressure Bonds – which means pressure on Home Loan rates to continue higher. Remember that as Bond prices go lower, long term mortgage interest rates go higher.

For these reasons, it may be an ideal time for homebuyers to take advantage of the still low home loan rates, and for homeowners to check and see if their debt is structured in the best way possible. Start by contacting your Mortgage Professional today.

What Do Employment & Global Unrest Have To Do With Rates?

There’s a lot going on in the news that is impacting consumers and mortgage interest rates each day. What do Employment and Global Unrest have to do with home loan rates and real estate?

To understand this, we need to understand the Federal Reserve’s stated goals for their current round of Quantitative Easing (“QE2”). The three goals are to (1) boost Stock prices, (2) create inflation, and (3) lower the unemployment rate. The Fed is doing this by injecting $600 Billion into the economy. In recent weeks, we’ve seen evidence of all three goals:

1. Stocks have been improving.

2. The unemployment rate has declined. Just recently, the Labor Department reported that the Unemployment Rate fell to 9%, and the U6 or "real" rate of unemployment, which includes discouraged workers and those who have accepted part-time employment for economic reasons, fell to its lowest level since April 2009.

3. We've seen an increase in global unrest of late (not just in Egypt), but in other parts of the world as well. This at least partially stems from increasing inflation in commodities and food.

The old saying of “Don't Fight the Fed" still rings true! While these goals are designed to stimulate our economy and keep our recovery moving forward (good) – they are unfriendly to Bonds, which means they are unfriendly to home loan rates too (bad).

So what does all this mean? It means if the Fed is successful in its goals boosting Stocks, lowering unemployment, and creating inflation, the negative trend in Bonds will likely continue and push home loan rates upward in the process.

For these reasons, it may be an ideal time for homebuyers to take advantage of the still low home loan rates, and for homeowners to check and see if their debt is structured in the best way possible. Start by contacting your Mortgage Professional today.

 

Washington State Election Results: No income tax!

In a resounding way this years Washington State Election Results are clear. Washington State residents want the government leaders to balance the budget without more income. Voters rejected a state income tax Initiative 1098 and repealed a tax on candy & soda I-1107.  With a state income tax suddenly Washington State doesn't look so appealing from a relocation point of view.  Thankfully voters rejected this initiative.

via seattletimes.nwsource.com

The big race Rossi(R) v Murray(D) that has national implications is still to close to call. With only 64% of the vote counted they are neck and neck.  Washington residence are familiar with long drawn out races and recounts when it comes to Rossi.  Keep track of this race and other Washington State Election Results at Komo News