Despite S&P’s Downgrade, Mortgage Rates Stay Low, at Least for Now.August 9, 2011
Mortgage rates, which are set based on the interest rates of U.S. Treasury notes and bonds, continue to move down, despite concerns the Standard & Poor's downgrade of Fannie Mae and Freddie Mac would have the opposite effect. Investors demonstrated more faith in U.S. credit than Standard & Poor's credit analysts, by snapping up Treasury notes and bonds and consequently pushing down interest rates on those securities. The net effect is lower mortgage rates.
The 10-year Treasury note traded at a yield of 2.34%, down from 3% just two weeks ago, a huge move. That 10-year yield is the benchmark used to set 30-year fixed mortgages.
Now 80%-owned by the U.S. government, Fannie Mae and Freddie Mac purchase bundles of mortgages from banks, providing lenders with fresh cash to make new loans. The Fannie and Freddie mortgages are then packaged into securities that are sold to investors.
In fact investors did demand slightly higher interest rates for such mortgage-backed securities on Monday, which increased the rate difference between mortgage securities and Treasuries. Normally this spread would result in higher mortgage rates but the drop in Treasury security yields more than made up for the difference.
But analysts warn the drop in interest rates may not last. If investors move back into stocks and out of bonds, interest rates on Treasury securities, and consequently mortgages, would rise.