As I am sure you have noticed, interest rates have gone up in the last week and half. Why is this happening?
There are, of course, many factors contributing to the increases. I will focus on two of the big ones. The stock market has been going up like crazy the last few months and last week the sale of bonds was weaker than expected. Both are related but one does not necessarily cause the other.
Let's talk about the stock market first. I believe the stock market is finally factoring in all the good news that has been coming out (company earnings, low unemployment, increasing wages, etc.) since the end of last year. If you remember, the market was somewhat stagnant last fall. So, why would this good news affect the interest rates negatively?
When the stock market is doing well the investing public wants a better return on bonds (higher rates or yield) in order to invest there instead of the stock market. When the interest rates on bonds are low, the only way for an investor to get a better yield is to purchase bonds at a discount. The bigger the discount the higher the yield. A hot stock market makes the discount on government bonds increase.
Next lets look at the sale of bonds by the U.S. Government. Why does the government sell bonds? This is the way a government finances itself when it operates in a deficit. The proceeds from the sale are used to pay interest on bonds sold in the past, fund ongoing governmental expenses, and retire old debt.
So, how does a weak sale affect interest rates and what caused it? When the bonds are put on the market, investors bid on them and set the price. High demand for the bonds would decrease the discount or eliminate it thereby lowering the yield. High demand is generally caused by a weak stock market, or falling interest rate environments, or a strong global demand for our bonds, or a combination of the three.
The stock market is going strong so that decreased demand. The Federal Reserve does not look like they will lower rates in the near future so that decreased demand. The weaker dollar has decreased global demand for our bonds as well. So, the government had a poor sale of bonds and had to discount the bonds to raise the money. Remember, big discount equals higher yield.
Banks and lenders have the choice of investing their money in bonds (relatively safe) or by loaning the money out (risky) to borrowers. In order for lending to be attractive to a lender, the return must be greater than they could get by just investing in bonds. So when the yield on bonds goes up, so must the interest rates on mortgages.
As always, your comments are welcome!
Brought to you by Professional Mortgage Group, Inc. in Columbia, Missouri.
There are, of course, many factors contributing to the increases. I will focus on two of the big ones. The stock market has been going up like crazy the last few months and last week the sale of bonds was weaker than expected. Both are related but one does not necessarily cause the other.
Let's talk about the stock market first. I believe the stock market is finally factoring in all the good news that has been coming out (company earnings, low unemployment, increasing wages, etc.) since the end of last year. If you remember, the market was somewhat stagnant last fall. So, why would this good news affect the interest rates negatively?
When the stock market is doing well the investing public wants a better return on bonds (higher rates or yield) in order to invest there instead of the stock market. When the interest rates on bonds are low, the only way for an investor to get a better yield is to purchase bonds at a discount. The bigger the discount the higher the yield. A hot stock market makes the discount on government bonds increase.
Next lets look at the sale of bonds by the U.S. Government. Why does the government sell bonds? This is the way a government finances itself when it operates in a deficit. The proceeds from the sale are used to pay interest on bonds sold in the past, fund ongoing governmental expenses, and retire old debt.
So, how does a weak sale affect interest rates and what caused it? When the bonds are put on the market, investors bid on them and set the price. High demand for the bonds would decrease the discount or eliminate it thereby lowering the yield. High demand is generally caused by a weak stock market, or falling interest rate environments, or a strong global demand for our bonds, or a combination of the three.
The stock market is going strong so that decreased demand. The Federal Reserve does not look like they will lower rates in the near future so that decreased demand. The weaker dollar has decreased global demand for our bonds as well. So, the government had a poor sale of bonds and had to discount the bonds to raise the money. Remember, big discount equals higher yield.
Banks and lenders have the choice of investing their money in bonds (relatively safe) or by loaning the money out (risky) to borrowers. In order for lending to be attractive to a lender, the return must be greater than they could get by just investing in bonds. So when the yield on bonds goes up, so must the interest rates on mortgages.
As always, your comments are welcome!
Brought to you by Professional Mortgage Group, Inc. in Columbia, Missouri.
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