Current Interest Rates – Week of 6/18/12

Interest rates could go up at a dramatic rate on Wed. 6/20.  Know the factors that influence rates this week before they go up.

What happened with interest rates last week?

Home loan interest rates and mortgage backed securities traded in a relatively tight range last week following the announcement of a $125 billion bailout of the Spanish banking system.  Since the announcement, investors and bond holders in Spain and Europe have fled their bond markets and found safe haven in other long term securities…Advantage U.S. home loan interest rates.  As the Spanish bonds have sold, the yield has climbed over 7% for the first time since Spain joined the EU.  Why?  The Spanish bond is now dependent on the $125 billion bailout actually working  and being paid back.  Since the market isn’t convinced it will work, they are having to offer a higher rate of return /yield to be able to attract further investment.

On the home front, Core inflation was released last week showing no signs of immediate inflation risk, which is more good news for bonds and interest rates.

 

What’s coming up this week on the economic calendar and what’s the impact on interest rates?

There are no bond auctions scheduled this week and the only highlight on the economic calendar is the FOMC meeting on Tuesday 6/19 and Wednesday 6/20.  The minutes will be released on Wednesday at 11:30 CT.  Going into the meeting the Fed will be reviewing the economic indicators in our U.S. markets but the global markets will also weigh heavily.  Based on our stagnant growth and the economic uncertainty in Europe.  There is a strong likelihood that the Fed decide a third round of Quantitative Easing (QE3) be announced.

While the Fed deciding they’re going to pump billions of dollars into the bond markets may seem like a good thing for interest rates, history as shown us that the immediate impact has been for interest rates to go up at a rapid rate.  This happens for two reason, 1) the stock markets see this as an opportunity to make some short term gains, let’s sell our low yielding bonds and make some money in stocks until the euphoria wears off, and 2) Inflation-The measure of purchasing power of goods/services.  If the Fed turns on the printing presses once again to come up with the billions needed for the “stimulus” or “easing”, what does that do to the dollars that are already out there?  They become less valuable.  More supply/printing –> lower value of the dollars that are out there.

Here’s a chart showing mortgage backed securities after the last two announcements of easing/stimulus.  The MBS were sold off, causing the yield/interest rates to go up.  After QE2, rates went up by 1% or more in less than 45 days.  “Operation Twist” gets announced, rates go up by .5% in less than a month.

 

Here’s our strategy for the days and weeks ahead…

If you have a home under contract or will be refinancing in the next 30 days, now is the time to create a strategy for your interest rate.  Between now and Wednesday afternoon, there is a small window of opportunity to lock in your home loan interest rate before the Fed’s decision/commentary has a chance to weigh on the markets and cause interest rates to go up.

While it is possible that interest rates continue to drift lower, but we have absolutely zero data to show that interest rates would improve by .25% or more from current levels as they already sit at/near all-time historic low home loan rates.  The data and information that we do have on hand shows how volatile the market can be after these Fed announcements and the risk of rates going higher seems MUCH greater than rates going lower.

We maintain an ongoing dialogue with our clients about the market and interest rates throughout their financing experience so we can take advantage of the lowest rates when they present themselves.  We all want the lowest rate, and the best way to ensure that you get the lowest rate, is to build a relationship with your mortgage planner, so they can best advise you on when to lock in your rate.  Call us today for a complimentary mortgage review or Apply Online.