Tuesday, June 9, 2009

As Bond Market Moves Lower…Home Loan Rates Move Higher

As Bond Market Moves Lower…Home Loan Rates Move Higher


Former Federal Reserve member Frederic Mishkin “Fast Freddy” and PIMCO's Mohamed El-Erian were both on TV this morning June 9, 2009 confirming that the Fed is in a tough position. With home loan rates spiking considerably higher in the past few weeks, the Fed has to be concerned about how this may impact the economic recovery, but unfortunately the Federal Reserve may not be in the position to do much.

The main Culprit for the free fall in Bond prices is the Treasury bond auctions and the increased number of mortgage refinance transactions which have occurred these past few months due to lower interest rates. This means hundreds of Billions of dollars of new Bond supply has been added to the market.

Economics 101 tells us that anytime supply vastly exceeds demand, prices will move lower, and that's exactly what we are seeing. As Bond prices move lower, home loan rates move higher. As we have seen in recent weeks, the Fed's purchasing program has done little to offset the enormous amount of supply and selling coming from the Bond market. And the trend isn't likely to end anytime soon, as the Treasury will have to continue to pump out major supply of Bonds, in order to pay for the massive government stimulus plans. The Fed buying plan simply won't be enough to balance out supply and demand. The Bottom line - rates are likely on the rise, but still remain near historic lows.

What this means is that rates are likely to move upward throughout the next months and time is short on taking full advantage of the low rates. Let's talk and make sure you have taken necessary actions for your own financial situation.

If current trends hold, rates will continue to go up.

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