Interest Rate Predictions Indicate Higher Mortgage Rates
Posted on | May 29, 2009 | 10 Comments
When attempting to make interest rate predictions one must first look at the prime rate as well as the ten year treasury yield. When the prime rate is low and ten year treasury yield is in a downward trend, it is almost inevitable that interests rates will head lower in the very near future. The same holds true of the opposite is the case; when the prime rate starts increasing and the ten year treasury yield is in an uptrend, interest rates are going to increase.
The interesting issue we currently have at hand is the fact that the ten year treasury yield started uptrending in January but the prime rate has been set to basically zero for quite some time. The prime rate has been set at zero because the Federal Government is willing to do whatever it takes to get financial institutions to start lending money again. If they let the banks and financial institutions borrow money for free, they are likely to start lending to borrowers at a much higher rate.
The issue we currently have has made it very difficult to make interest rate predictions. There is no doubt that the government is going to keep the prime rate as low as possible until they see the end of the recession at the end of the tunnel. No one knows when this will be but it doesn’t seem likely in the near term. So one would think that interest rates would remain low until the government increases the prime rate.
The other side of the argument is that mortgage interest rates are directly correlated to the ten year treasury yield. With the current ten year treasury yield at 3.7%, mortgage rates should be hovering around 5.6% and not the 4.9% they are at. The Federal Reserve has created artificial mortgage rates by buying back mortgage backed securities, but there is only so much they can do before free markets actually work and mortgage rates follow the ten year treasury yield.
To make a prediction on where interest rates are headed, you must decide what is a better indicator of interest rates. Is the prime rate a better indicator or is the ten year treasury yield better? I personally believe in free markets and do not like the idea that the government is trying to force mortgage rates below 5%. They have definitely done this for the past two months but eventually they are going to run out of bullets. There is only so much money that Ben Bernanke can print before other countries stop investing in our currency.
The dollar has already taken quite a plunge since the announcement that the Federal Reserve Bank was going to buy back over $1 Trillion in mortgage backed securities. It is likely that we will continue to see the dollar sink as the United States is printing this money rather than taxing the citizens. In my opinion, neither should happen and the government should let free market capitalism work. As most of you know, that will definitely not happen with the Obama administration.
With all of that being said, I predict that interest rates will head higher with the ten year treasury yield. If the yield continues its uptrend that started back in January, it is likely that we will see mortgage rates back up to 5.5% or higher. The government will do everything they can to stop this, but sometimes there is only so much that can be done. If mortgage rates do continue higher then it will be very interesting to see where the housing market goes.
With higher commodity prices, plummeting home values and the dollar sinking to new year to date lows each and every day, things do not look good for American citizens. I know that President Obama and his staff are working very hard to help this economy but it seems like we are shooting at a target and missing greatly. All of the plans he has enacted should begin to show in the economic data, but we have yet to see results.
I will be very interested to see the sentiment of our President if the economy continues on the path it is on. Unfortunately, most Americans do not realize where we are headed. There is something to say about being optimistic, but being blind to the fact that things could get much worse is a deathtrap. I think we all have friends and family who feel the current recession is almost over because “the news said things are getting better.” Of course the news says things are getting better, most media outlets are in love with President Obama.
I do not like to be the bearer of bad news, but how have things gotten better? Are any major PRIVATE corporations hiring? Has anyone seen the value of our currency increase? Is your home value appreciating? Are college students getting hired to great jobs like they deserve? I would imagine that the answer to each of these questions is a solid NO! Please do not drink the Obama lemonade and think that every plan this man creates is going to help this economy. I totally admit that he is trying very hard, but some of the ideas he has created are not helping.
I am sure we will continue to try different programs as our president is all about change, but I would like to see a change that actually works. From the beginning of this presidency I stated that taking money from the rich and giving it to the poor would not help this economy; it looks like I have been right so far. I also disagree with President Obama feeling that the dollar “remains strong.” The current results of the President Obama vs Subprime Blogger investment challenge are as follows:
SPY – UP 19.9%
USD – DOWN 5.4%
While President Obama feels the dollar is strong, I believe the opposite therefore I invested in the commodities etfs of Energy, Precious and Base Metals and Agriculture. Here are my investment returns since March 22nd:
DBA – UP 11.4%
DBB – UP 12.3%
DBE – UP 16.8%
DBP – UP 4.7%
Very interesting to see that I have definitely caught up to the President and I am confident I will dominate this challenge in the years to come!
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Tags: financial institutions > Interest Rate Predictions > interests rates > lending money
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May 29th, 2009 @ 2:08 pm
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January 11th, 2010 @ 1:45 am
Your site was extremely interesting, especially since I was searching for thoughts on this subject last Thursday.
I’m Out!