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U.S. Credit Downgrade: What’s Next for Mortgage Rates?

Last Friday evening, S&P downgraded the U.S. credit rating. This marks the first time that the U.S. has seen its sterling rating tarnished. Since then, the stock market has been quite volatile, with investors being taken on a wild ride. However, the stock market isn’t the only thing that might be affected by the credit downgrade. Mortgage rates might soon be affected.

If Treasuries Rise, Mortgage Rates May Rise, Too

One of the possible effects of the credit downgrade could be higher yields on Treasuries. Because U.S. debt is not considered as “safe” as it used to be, investors could demand higher yields. Because mortgage rates are influenced by the yield on 10-year Treasury notes, there is a good chance that mortgage rates could rise if Treasury yields head higher. Other borrowing costs could rise as well if the credit market ends up squeezed. Your perception of the possible outcome of the credit downgrade is likely to dictate whether or not you hurry to lock in relatively low rates now.

So Far, Treasury Yields Remain Low

Even with the downgrade, Treasury yields have remained near record lows. This is largely due to concerns about other investments. Right now, there are rumors that the French credit rating could be downgraded, and there is a great deal of focus on bank stability and sovereign debt issues in Europe. Plus, fears regarding another global recession are driving investors into safe havens.

Even with recent political and economic developments, U.S. Treasuries are still considered among the most stable and safe investments in the world. As a result, they are in high demand right now. With all the demand, it is keeping prices high and yields low (for Treasury notes, prices and yields move inversely to each other). So, for now, mortgage rates are likely to remain fairly low; there is no reason for them to rise with low Treasury yields and a still-sluggish housing market.

Of course, it is important to note that the situation could easily change. Investors could once again fear for the stability of the U.S. financial situation, or matters in Europe could show some improvement, encouraging investors to look at other assets. If that happens, then Treasury yields would have to rise in order to attract more investors. Before making a decision about what to do, consider the situation, and consider what you think is likely to happen. Then plan accordingly.

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