Long-term interest rates are recovering from the debt ceiling news crisis

Debt Ceiling News – Averting a Disaster

Casey Fleming

Now that the leaders in Washington have come to an agreement, debt ceiling news is all rosy. As a result, the stock market rallied, and long-term interest rates moved down this week.  What will happen now?

First, the stock market rallied as investors breathed a sigh of relief that our leaders were not going to burn down the economy playing chicken. The market rose a bit on Thursday (the Senate had not voted on it yet) and then really took off on Friday, June 2nd when debt ceiling news included the passage of the bill by the Senate.

Bond yields—a benchmark index for long-term interest rates—fell on Tuesday and Wednesday, but were relatively flat on Thursday and Friday

What Else Will Affect Interest Rates Besides Debt Ceiling News?

It all comes down to inflation, as I’ve mentioned before. Long-term interest rates are high because inflation is high, at least relative to the last 30 years. The Fed has been trying to tame inflation by slowing down the economy. While they would love to only slow it down and not throw the U.S. into recession, economics is not an exact science and it’s not easy to hit the target perfectly.

The target is to get to the point where job openings no longer exceed the available workforce in order to take pressure off of wage increases. They want there to be more available workers than jobs. Right now, employers have to compete for workers, so they’ve been bidding up wages to attract them. The job openings report this week showed that there were still over 10 million job openings, defying the Fed’s attempt to slow down business.

Thursday’s jobless claims report showed 232,000 Americans filed for unemployment, a few more than last week, but still slightly less than expected.

Then Friday’s nonfarm payroll report showed that employers hired 339,000 new hires in May, again exceeding expectations. The labor market is still tight, and that’s not good for inflation.

On the other hand, the unemployment rate rose from an historically low 3.4% in April to 3.7% in May.

Is the Economy Slowing?

And here’s the bright spot. The only way you could have a net increase in jobs and an increase in the unemployment rate at the same time is if the workforce expanded. How could that happen all of a sudden? In May and June millions of college seniors graduate and enter the job market en masse. The workforce grew. Deaths and retirements happen steadily over the seasons, but every spring the workforce has a surge of new workers looking for employment.

It is this surge in the workforce that may help bring the ratio of job openings to available workers down and push debt ceiling news to the back burner. Other factors may help, too. Increasing wages often bring workers who have dropped out of the work force back, and an abundance of available jobs means workers may come back simply because they have more interesting options.

Pivoting From Debt Ceiling News to Mortgage Interest Rates

Last week we took a deeper look at the crazy interest rate swings driven by the debt ceiling news.

Take a look at the chart below. From about 5/10 through 5/26 investors pushed the yield on the 10-year bond up nearly 0.50% for fear the debt ceiling news would not be good. The Fannie Mae yield (essentially wholesale mortgage interest rates) followed closely, and retail lenders pushed their margins up to mitigate the risk of committing to loans they wouldn’t be able to sell for a profit. (In case the debt ceiling news was bad.)

Long-term interest rates are recovering from the debt ceiling news crisis
Now that the debt ceiling news crisis is over, mortgage rates should settle down

Starting Tuesday of this week (Monday was a holiday) investors started moving money back into bonds. (You can see bond yields dropping.) Fannie Mae didn’t respond immediately, but retail lenders did, dropping their margins even before Fannie made adjustments.

Looking Forward

Inflation is decidedly on the decline. May’s CPI reading came in at 4.9% year-over-year, the lowest reading in over two years. Investors in 30-year fixed mortgages don’t care about the current inflation rate, however. They care about the anticipated rate of inflation over the duration of the mortgage.

With rates tumbling down, it is clear investors believe that the rate of inflation will eventually return to the Fed’s target level of 2% to 3%. 30-year-fixed mortgage rates for the most qualified borrowers tend to run 1% to 1.5% above the long-term inflation rate, so we can expect mortgage rates to return to the 4.5% to 5.5% range once it is clear inflation is under control.


Casey Fleming, Mortgage Advisor and Author of The Loan Guide (2014) and Buying and Financing Your New Home (2023)

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About Casey Fleming: Casey Fleming is a veteran mortgage advisor (NMLS 344375) and Author of The Loan Guide and Buying and Financing Your New Home writes extensively about real estate finance, the real estate market, and the relationship between economics and finance. He advises clients throughout California, and is based in the heart of Silicon Valley.  He writes articles regularly for several online publications, is a subject-matter expert for two prominent finance-related sites, and is regularly quoted in articles for many other publications.

This article represents the opinions of Casey Fleming, and not necessarily those of any company or organization cited or mentioned in this web site.  This analysis was prepared with the best information available at the time it was written.  We do not have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source.  No warranty is made that the outcome will reflect the projections in this article, and neither the author nor LoanGuide.com are responsible for decisions that you make regarding your choices about your real estate or mortgage or those of your clients.

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Resources Used for This Article:

Labor Market Defies Recession Fears – Reuters

Job Creation Soars Past Expectations – CNN Business

US Hiring Jumped Last Month: So Did Unemployment – AP News

Current U.S. Inflation Rates – InflationCalculator.com

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