Treasuries are trading significantly higher today — at their highest interest rates in six months. Several factors are pressing this: Expectation that the Federal Reserve is going to raise interest rates, in part because of a Labor Department report last week showing US companies added 162,000 workers in March (compared to a 36,000 loss in February), and an expected report today that will show that US service industries expanded significantly last month. Both are indicators that the economy is heating up. [Bear in mind always though that, in particular, governmental reports can be manipulated. –Ed.]

The Fed rate to banks is currently at .75%, but expected to be raised today
to 1.00%. This is not the same thing as a mortgage rate increase, which
varies daily with the Treasury rate; and is not even the same thing as a
HELOC rate increase, which would be the Fed Discount Rate. But, WILL make it more expensive for banks to borrow money from the Fed, thus chilling their lending ability to individuals, and the next “elephant in the garden”,
commercial interests.

Additionally, today’s auction is the first of four this week, totalling $82 Billion dollars. This, in addition to March 27th’s $118 Billion, marks a significant increase in debt, as these auctions have only been around $9 Billion per week for the past couple of years. And investors around the world are beginning to grow increasingly leery of US Debt as “safe haven”, thus requiring more interest to hold them. Understand that about 40% of the Treasury purchases are foreign governments; so Treasuries are truly in a global market, such that everything we do here domestically has impact on what happens to us globally, rate wise. –And, therefore, (with interest holding costs by our country) comes back to us here domestically, as well.

As a significant factor, this year, President Barack Obama has increased US debt to a record $7.41 Trillion to fund spending programs; and his administration is predicting the annual deficit to increase to $1.6 Trillion this year, up from $1.4 Trillion, last year. Bloomberg news quotes Martin Mitchell, head government bond trader for Baltimore office of St Louis’ Stifel Nicolas & Co, “The market is starting to react to growing fiscal deficits. The last round of weak auctions are still fresh on everyone’s mind. This week’s auctions will be telling to see if sponsorship continues to decline.”

Well said. Keep an eye on where this thing looks to go in the future. I’ve
been telling friends for months — and I say it again here — if you’re in a
“variable rate” mortgage, you have to change out of it now to something
fixed. Rates are not going to get lower than they are — and have
significant potential to reach double-digits before long. Housing is still
struggling to recover, and if commercial loans begin to get affected, or the
second wave of home mortgages goes under distress (with the 5-yr adjustables slated to adjust this summer, and perhaps causing a second wave of mortgage distress), we could see some REAL challenge, and interest rate increase.

One comment

  1. Good points Don. Inflation is coming as well because of all the money that’s out there which is also say that along with the potential of rising interest rates (to me, it’s more a certainty, just a question of when), it would wise now to shift from variable rates products to fixed rates. When inflation hits (again, the question to me is not if, but when), you’ll have locked in a rate at “pre-inflation” levels, meaning that when inflation hits, you may have (all else being equal) more money to pay off what will then be a VERY low-rate mortgage, comparatively speaking.

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