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Who We Are
Who We Are
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So What Does it Mean?
For the tenth time this year, the Federal Reserve has cut interest rates. This, however, will do nothing to help long term interest rates... the kind that are used to purchase or refinance homes. That was usually based against the Long Bond, or the 30 year Treasury Note. It had been failing in recent years as the benchmark that it once was as bond traders preferred the ten year note as a better indicator of what interest rates should be.
But when the Treasury suddenly announced last week that the 30 year note was canceled, this was good news for the folks who are looking for cheap money to purchase a house, or for those who wish to refinance, tapping the equity in their property.
Why hasn't the numerous rate cuts over the last year effected mortgage rates the way eliminating the 30 year note will, you may ask?
Believe it or not, bond traders, those folks in the pits with colorful jackets and aggressive demeanor are actually the very same people who determine long term interest rates. They were worried, as only they can do, that what the Fed was doing would have a negative effect on inflation and that would not be good for investors or their returns. They are also concerned about the return to deficit spending.
That said, here's what happens in those trading pits when the long bond is no longer sold. They are forced to buy 10 year bonds which have a great deal to do with mortgage rates. So these folks start buying the ten year, which pushes the price higher, and the yield lower (because the yield moves in the opposite direction of the price). And when that rate falls, so go the mortgage rates.
Add in a staggering economy and you have a formula for rate stabilization for at least the next three months. Maybe longer.
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