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US credit downgrade and the effect on mortgage rates –  How the economy plays a role

When a person is in the market to get a new house, he must be looking for the best mortgage rates so that he can live with the home loan and repay it without falling back on the other monthly debt obligations. If you have to be aware of the present mortgage rates, you also have to be aware of the current market situation. The interest rates on the mortgage loans are usually tied to the activities of the Wall Street and the national economy and both of these vary day to day. Whenever the Federal Reserve takes the decision of raising the interest rates, the lenders immediately respond by raising their personal yields with their investors and this directly leads to an increase in the mortgage rates. Similarly, the mortgage rates may even fall when the condition of the economy is sluggish and in such a situation the Federal Reserve takes immediate action to revitalize the economy.

The impact of the US credit downgrade – What’s the future of mortgage rates?

Few weeks ago, the Standard &Poor’s downgraded the top-notch credit rating of the US, AAA to AA+ and since then the US stock market has been extremely volatile and the investors are being taken on a roller-coaster ride. However, apart from the stock market, the impact can be well seen on the mortgage market too.

Do the mortgage rates rise if the Treasuries rise?

The higher yields of the US Treasuries are one of the most possible effects of the US credit downgrade. After all such incidents, the US debt is no longer considered safe as it used to be and naturally the investors are demanding higher yields. Since the interest rates on most mortgage loans are tied to the yields of 10-year Treasury notes, it is most likely that the mortgage rates will rise if the yields on the Treasury are also higher. The other costs of borrowing loans will also directly rise if the credit situation of the market suddenly gets squeezed.

Even though the S&P has downgraded the pristine credit rating of the US, yet the Treasury yields have remained at their record low level and this is precisely due to the concerns regarding some other investments. There have been some rumors that the French credit rating will also be downgraded and therefore there is a sharp focus on the debt problems within Europe. Despite all such economic developments that are having an adverse impact on the consumers and the investors, US Treasuries are still considered as the most ‘safe’ investment in the world and this is spurring the demand. With all the demand, the prices are high and yields are low. So for now, the mortgage rates are likely to remain low and there is no reason to rise in the still-sluggish housing market.

Therefore, you can well understand that the mortgage rates can change with the constant change within the economy. There could be some stability in the market if the debt situation in the Europe improves and the Treasury yields also rise so as to attract more investors.