On Aug. 5, this column addressed my confusion as to why interest rates were falling just days ahead of the deadline for Congress to raise the nation’s debt ceiling or otherwise risk defaulting on the country’s fiscal obligations. It would seem that such uncertainty would put pressure on bond prices and rates would rise.
I concluded that investors believed a deal would be made in Congress at the last minute. Moreover, it seemed as if the continuing negative news on the economy was propping up investors’ appetite for the relatively safe investment in U.S. Treasury bonds. I noted that the yield on the 10-year Treasury bond had fallen to 2.85 percent, near historic lows.
A lot has happened since that column was published. Congress did indeed come to a budget agreement, and the debt ceiling was raised, further supporting bond prices and lowering yields. Then, on the evening of Aug. 5, the credit-rating agency Standard & Poor’s downgraded U.S. debt one notch, from the highest, AAA, to AA+.
Over the weekend, amateur financial hobbyists around the country such as myself discussed the implication of the downgrade around backyard barbecues and summer parties. How was the market going to react on Monday morning?
One would think a downgrade would cause a sell-off in bonds, causing a sharp rise in rates because of the perceived higher risk. My prediction was that rates would not move much. Markets are smart, and a downgrade could have been built into the price already.
I was wrong. Interest rates started plunging Monday morning, with the 10-year Treasury yield falling from 2.60 percent to 2.30 percent by Tuesday. A very good friend and neighbor of mine, who is a financial guru, explained it perfectly: “Where else are investors going to put their money?” It seems he was right. As dysfunctional as the U.S. economy is, the rest of the world is faring worse.
Then, on Tuesday afternoon, Federal Reserve Chairman Ben S. Bernanke made an unprecedented announcement. He said the Fed would keep short-term interest rates “exceptionally low” until mid-2013 - two years from now.
The Fed traditionally has been vague in its public statements. This time, however, it gave the markets assurances that it would not raise rates for another two years if the economy continues to flounder. Markets also interpreted the statement as a wake-up call that the U.S. economy is nowhere near recovery.
Interest rates plunged on the news, with the 10-year Treasury yield briefly falling as low at 2 percent. As of this writing, the yield is hovering around 2.18 percent.
Needless to say, mortgage rates have followed, and many of those who refinanced to the ultralow rates of last November have a shot at lowering their rate even further.
Those in my business seem to think these rates will remain low for a while. I certainly can’t make that prediction, but if they do, let’s hope it jump-starts the anemic housing market, which appears destined for stagnation for the foreseeable future.
Stay tuned.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.
Please read our comment policy before commenting.