NWA Real Estate May 26, 2023

Debt Ceiling Effects on Mortgage Rates

Debt Ceiling Effects on Mortgage Rates

The biggest news currently with regards to the economy and the market is of course the Debt Ceiling Debate.  The rates in regards to mortgages have certainly seen struggles over the last 2 weeks due to this debate and the fact that we are drawing closer to a deadline with a risk of default if the Debt Ceiling is not raised.

One would not think that the Debt Ceiling has anything to do with mortgage rates, and truthfully it does not directly, but indirectly is another story. We must remember that the U.S. relies on foreign central banks and international investors support of the U.S. Dollar as the world’s go-to currency.  A mere risk or mention of potential default by the U.S. government in regards to its debt precipitated by a failure to raise the debt ceiling which is what allows us to pay our debts causes an increased ripple effect on the volatility of the U.S. and global economy. This alters the otherwise positive presumption that U.S. Treasury bonds are a safe source of income.

Remember that any market volatility causes an increase in interest rate and right now the center of market volatility is resolving around the Debt Ceiling debate. Jerome Powell told lawmakers very blatantly that Congress must raise the U.S. Governments borrowing limit to avoid what he called “extraordinarily adverse damage to the global economy.” A direct effect of the Debt Ceiling Debate can be seen in the general ebb and flow of risk sentiment throughout the market.  Two plausible outcomes can be seen moving forward.

Outcome One – once the Debt Ceiling Debate is resolved (prior to default) in a timely manner, investors will see less risk and become more interested in the normal day to day purchase of stocks and bonds which would alleviate the current heightened volatility within the market allowing rates to ease back down into a normal range of the low to mid 6’s.  At which point the FED will continue on its stance of holding rates in that position throughout the course of 2023 in order to make sure the effect on inflation does its job.

Outcome Two – the Debt Ceiling Debate is resolved but goes all the way up to the wire of default, resulting in significant dire consequences such as downgrading of the U.S. Credit Rating which would weaken the U.S. dollar and the ability to pay our bills.  This happens because as the dollar weakens in value it costs more to pay of that debt.  Popularity of U.S. Bonds weakens, the market continues to see increased volatility, ultimately resulting in a longer and more painful stretch of heightened interest rates.

Over the last 6 months we have discussed that we are on a bumpy road, with this just being the latest bump along the way. The mini-roller coaster of interest rates will continue and it is a matter of time before we reach that final down-hill decent back into normalcy.

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