I haven’t written about interest rates for a while because there hasn’t been a lot of good news, and I’ve been writing about other things anyway. But I know that as interest rates begin to fall again some of you will want to know.
Rates were definitely headed up through most of June and early July, but seemed to level out in early July and remain in a very small range most of the month. The smartest guys in the room have all expected interest rates to rise for some time, and no one wants to get caught with their pants down, so to speak.
But interest rates (as you know if you’ve read my column before) aren’t “set” by anyone. They are driven by market forces, in a complex interplay between investors and borrowers, with investment bankers, banks and mortgage companies as the middlemen (middlepersons?) playing referee. When you elect to invest some of your 401K into a mortgage-backed security bond fund, you impact interest rates. If you are like me your impact is so close to zero that no one would know, but you get the point.
When the stock market turns volatile (or is expected to) a lot of investment money finds its way into safe-haven investments, like treasury bonds and mortgage-backed securities. When investors push money into these investments, the extra money drives interest rates down.
A combination of world-wide events plus doubts about the momentum of the U.S. economy and stock market valuations have made investors nervous enough equities (stocks), plus higher interest rates (yields) made bonds more attractive and money has begun moving into them. You can see the trend in the 10-year Treasury bond in the chart to the right, but not yet in mortgage rates. Why?
When a mortgage lender sets the price (rate) you are going to pay for a loan that you lock today, your loan won’t be closed for a while and probably won’t be sold off to investors for at least a couple of months. Then it will be another month (or two, or three) before the loan is bundled into a package of hundreds of loans and securitized with a bond. (This is a huge simplification, but describes the basic mechanism.)
When lenders price, therefore, they are pricing loans that investors won’t invest in for another three to five months. By analyzing the current market conditions, studying economic reports for signs of inflation, reading tea leaves, holding a séance and throwing darts the lenders must divine what yield will be attractive to investors at that time.
And since they are pricing (in some cases) loans that you will hold for 30 years, they have to be cautious. A mistake could be expensive. Consequently, interest rates tend to jump up at the first sign that investors will demand higher yields, and settle down slowly only as calm returns to the markets and it is clear there is demand for lower yields.
Today we see some early signs that investors might be willing to take a lower return in exchange for safety, because of worries about how their other investments will be impacted by the situation in Greece, the stock market in China, and a number of other potential risks to stock prices and corporate profits.
The ten-year U.S. Treasury Bond tested highs in June (see chart above) but retreated, and now seems bent on coming back down a bit. If the trend holds, mortgage rates are sure to follow. Falling interest rates will carry through to the rate you pay for your mortgage.
I know of no one who believes the long-term trend for rates is lower. But we may have just a little more time to enjoy 30-year mortgage rates that are so low they are ridiculous by historical standards.