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Mortgage Rate News

August 1, 2011

“I GET IRRITATED, NERVOUS, VERY TENSE OR STRESSED, BUT NEVER BORED” – French actress Catherine Deneuve. Those words sum up the state of mind not only in the markets last week, but also across the country. The Dow finished its worst week in a year and Mortgage Bonds traded in a volatile fashion last week, mirroring the tense – and often irritating – news out of Washington. These are anything but boring times. But how does the Debt Ceiling debate impact Bonds and home loan rates? Read on to find out.

The volatile and uncertain news story created a rare trading correlation between Stocks and Bonds. Often, Stocks and Bonds trade in an inverse direction (meaning that if one goes up, the other typically goes down). However, in 8 out of 10 recent days, both Stocks and Bonds have traded in the same direction – and this unusual scenario has happened less than 1% of the time over the past decade.

No need to panic. One important item to note is that the recent losses in the Bond market are far from a “panic selling” scenario, which indicates that the market senses that a deal will ultimately be made on the debt ceiling debate and that in the long term US Debt will still provide a relative safe haven from global uncertainty and economic sluggishness.

After all, the weak economy in Europe is still a factor. And in a world where there is high uncertainty and weak economic prospects, the US Bond Market will continue to attract funds – which could help keep home loan rates attractive for now.

Two Scenarios… No one knows exactly how the Bond market would react if the August 2nd deadline comes and goes without a debt agreement, since this has never happened before in the history of our country. But here are two scenarios to consider…
1. If a deal DOES pass, which many experts still think will happen, any deficit reduction program should strengthen the value of US debt, because there will be less spending. At the same time less government spending will also weigh on Gross Domestic Product (GDP). And just last week we saw how weak the GDP already is when the 2nd Quarter GDP came in well below expectations and at the slowest growth rate in 2 years. Additionally, the 1st Quarter GDP was revised sharply lower than it was previously reported. Remember, a weak GDP would make Stocks LESS attractive and Bonds MORE attractive – as Bonds generally perform better during sluggish economic times.
2. If a deal does NOT pass, the Treasury will be unable to auction off new securities since we will be unable to take on new debt as a country because we have reached our debt ceiling limit. The lack of new Bond supply coming to the Bond market will make existing Bonds/Treasuries/Notes more valuable – which is the opposite of what happens when new Bonds continue to flood the market.

Time for a contingency plan? Last Friday, Mortgage Bonds got a boost higher on news that a Debt Ceiling contingency plan would be brought forth by the Treasury Department. The plan would ensure present holders of US debt will receive their interest payments on time before making other payments, even if the debt ceiling is not raised. Such a move would likely push out the original August 2nd deadline to somewhere in mid-August, helping the US buy some more time as the frustrating-to-watch Debt Ceiling debate wages on.

The bottom line is that Bonds are still holding their own and home loan rates are still attractive for now. So if you or someone you know has been considering refinancing or purchasing a home, it’s a great time to look at your options. After all, this is a very volatile world and the current bullish sentiment in Bonds could change in a hurry.
Thank you Alan World Gem Mortgage Orange CA 714-569-3636

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