Mortgage Market Update February 23, 2010

As usual lately, there has been some interesting news affecting mortgage rates. Over the past two weeks rates have been on the rise. The causes of this increase have been numerous.

Mortgage rates are closely linked to the current rate of the Federal Governments 10 Year Treasury Bond. The 10 Year Treasury rate has increased from 3.55% to 3.80% over the past 2 weeks and mortgage rates increased from 5.0% to 5.25%. What caused this increase?

One of the main factors influencing rates right now is the Federal Government issuing massive amounts of new debt on a weekly basis to fund the budget deficit. Recently, these auctions have been met with lackluster demand as foreign buyers of US debt at some point decide that there is only so much US debt they are willing to hold. This lackluster demand for new US Gov’t bonds causes the rates paid on these bonds to rise so that investors will be encouraged to purchase them.
The other factor that influences interest rates in general is current economic news. Interest rates are generally lower in poor economic times and move higher when the economy is good. Rates have been very low over the past 18 months due, in part, to the weak economic times we have been experiencing. When the economy starts to heat up investors fear inflation and inflation erodes the value of fixed income investments, so, investors require higher rates of return to make up for those losses.

Recently, the news reports have been a bit more positive than expected and this has caused concern that inflation might start to rise and that makes interest rates go up. The latest news has included:

1) Producer Price Index (PPI) went up 1.4% with the core rate up .3%, according the report issued February 17, 2010. Both readings higher than expected. PPI measures the prices that companies pay for the raw materials they need to produce goods. This report means it was more expensive to make products. When it’s more expensive to make an item producers will naturally want to increase the price of the product and an increase in the price of products is – inflation
2) January Industrial Production, also released February 17, 2010, increased by .9%. This is an indication that manufacturers are busier than expected. A sign the economy may be heating up
3) Finally, the Federal Reserve Bank increased the Discount Rate last week by .25%. The Discount Rate is the interest rate the Fed charges to member banks for short term loans. It is more of a symbolic move than anything else but it is an upward move of a key interest rate that the Fed controls and could mean the Fed will start increasing the Federal Funds rate at some point in the near future. This would have a much more direct impact on interest rates in general

So, mortgage rates have moved up a touch, but, are still very very low!