My Real Estate Blog

Pretty simple –

The fed is having to sell more treasuries to finance the economic recovery packages, the bank bailouts, the GM situation, the war, and the buying up of all these mortgages.

In addition, as the debt grows, they have to pay interest to all of these bond holders so they even have to issue more debt to do that

On the other side, buyers are scarce. China is less affluent and weary of US debt – there is even talk of downgrading US debt by Moodys (England downgrade possible too).

As a result, in order to sell more debt and attract skittish buyers, the prices of treasuries have fallen in recent auctions – price/yield is adverse in relationship so when the price drops (in order to attract buyers) it means the yields rise. As a result, the 10 year treasure yield has risen from 2.533% on march 18^th to 3.695% on May 27^th. That is over 100bos (1%) in yield.

Rates have not risen as much because the fed is still buying mortgages out of the market, so spreads over treasuries are narrowing despite rising rates.

This is why federal debt is actually inflationary – but if they weren’t doing what they are doing in the short run, mortgage rates would be in the 6.5% range.

I do believe rates will rise ultimately here – and this trend will continue unless the international market becomes more supportive of US debt.

Quick answer – buy now – don’t wait for lower rates.