Government Bonds, Yields and Mortgages
Govt bonds have always stayed in, basically, the same range. They, usually, stay below par, below the price of a new bond. In November of 2008, the bond market spiked well above par as interest rates were diving and people fled to safety of govt bonds.
The Feds have been very busy buying bonds on the free market to support this kind of rally. Bernanke printed $1.3 trillion Dollars to go out and buy treasury bonds in the free market, all in an effort to lower rates and raise the value of our bonds.
Unfortunately, overwhelming spending and quadrupling of our national debt have caused our credit rating to get shaky. This has caused a decline in our bond market and a subsequent rise in yields.
Last week, our bond auction went out at the highest rate since last August, almost 4%. To put that in perspective, an investor has a choice, invest in a mortgage that generates 4% or a govt bond that generates 4%. The choice is pretty clear as one carries a lot of risk and the other one, should, less.
As bond yields climb up so will mortgage rates. The Feds will have to either raise overnight rates to curb inflation and catch up with bond yields or fight the trend by printing out even more money and support the bond market. Either way, this could spiral up and caused mortgage rates to rise, putting a dampener on the real estate market recovery.
