Incredible Interest Rate Opportunity

Mortgage rates and U.S. Treasury yields seemed to play the Limbo last week, with everyone wondering how low rates could possibly go. Last week, the market saw all-time lows for mortgage rates, with borrowers qualifying for rates that had previously seemed unimaginable. With continual disappointing domestic economic reports, Europe floundering to avoid a Greece debt default, and countries around the world trying to avoid a similar debt crisis, all eyes were on what the Federal Reserve would announce to help counteract this global economic slowdown.    

Going into the Fed meeting, rates were already low, as investors had fled the equity markets for the safe haven of U.S. Treasuries. But after a two day meeting, rates surged dramatically lower on Wednesday as the Fed announced “Operation Twist”. The plan includes purchasing $400 billion in longer term Treasury bonds, to help stimulate lower long term interest rates. As borrowers pay down the mortgage-backed securities the Fed purchased as part of their “Quantitative Easing” programs, the Fed also plans to reinvest that money into purchasing new mortgage-backed securities, which would also help stimulate long-term borrowing. Lastly, the Fed indicated it expected economic growth to be very slow and that low interest rates would be maintained through mid-2013. The end result has been a very low mortgage rate environment with an incredible upswing in mortgage applications as borrowers rush in to take advantage of these opportunities.  

Compared to last week’s historic lows, rates have inched upward slightly, as some investors are shifting money back to equities with the talks of steps the European Central Bank (ECB) will take to ease the debt crisis and help boost the economy. Thursday and Friday’s surge in mortgage applications also began to test the amount of investor appetite in the space, which helped level out the rate decline.   

This week, the news to watch for will not only center around how well Europe continues to deal with their economic challenges, but also the numerous opportunities we’ll hear from Federal Reserve members, including Chairman Bernanke on Wednesday. Friday will cap off the week with Personal Income & Spending data for August. If more positive rumor circulates around Europe prior to the October 6th ECB meeting, or if we start to see some general positive economic momentum, this could shift more money out of Treasuries and cause a slight rate increase.   



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