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Saturday, August 6, 2011

U.S. Debt Downgrade & Mortgage Rates

As the stock market tumbled this past week, mortgage rates rallied. Rates for home loans fell to the lowest level of the year on Thursday. On Friday, rates gave back some of their gains, but after trading hours the really big news hit the wire. Standard and Poor's (one of the big three rating agencies) believes that U.S. Treasury debt is no longer safe enough to deserve the top credit rating.

How does this news impact mortgage rates? We won't know for sure until the market opens on Monday, but logic tells us that rates must rise. If Treasury securities are now more risky, then investors will demand a higher yield. Treasure rates which are the benchmark for other bonds will rise. Investors that buy debt should also demand higher yields on corporate bonds and mortgage backed securities.

We'll be anxiously awaiting investors' reaction on Monday morning when the market opens.

3 comments:

  1. The opposite could also happen. Investors could see mortgage-backed securities as safer investments than treasure bonds, as they are have homes as collateral. This would increase the demand of these securities, driving prices higher and yields (hence mortgage rates) lower.

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  2. Stocks are taking a beating Monday morning. Looks like the opposite is happening and mortgage rates may even get better.

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