The debt ceiling is over: Will mortgage rates rise again?

As predicted by Treasury Secretary Janet Yellen, on January 19 the US hit debt ceiling, the maximum amount he can borrow to pay his bills. The up to $31.4 billion is expected to cause a debate in Congress on whether to increase or stop the limit to help the country to meet its financial obligations.

Congress has changed the debt ceiling 78 times since 1960, so this is not completely uncharted territory. What’s different this time is the legislation recently used by House Republicans to make it harder to raise the cap and give Republicans more power over spending cuts. President Biden has promised that he will fight any demand for cuts, which could lead to a long battle.

Yellen promised in a letter to Congress last week that the Treasury Department would take “extraordinary measures,” including temporarily halting investments in some federal pension funds and funds. disability, to prevent the US solvent until June. However, without a resolution by then, the US could default on its debt, an outcome Yellen said would cause “irreparable damage” to the economy. and have important implications for consumers.

How will hitting the debt ceiling affect mortgage rates?

Mortgage payments reached a 20-year high this fall in response to the Federal Reserve’s retrenchment interest rate hike, which was aimed at curbing inflation. (Although the Fed doesn’t set mortgage rates, its actions affect them.) Rates began falling in November and averaged 6.15% for the week ending January 19 — a four-month low. .

But putting a ceiling on the debt could reverse the situation. Mortgage rates tend to go up and down 10-year Treasury. Treasury notes are generally considered a fixed (or “safe”) income, since they are backed by the US government. Mortgage securities, on the other hand, are a riskier investment, since they are based on the cost of home loans. When Treasury rates rise, so do mortgage rates, to compensate for the additional risk.

So how does the 10-year Treasury note fare in a fight over the debt ceiling? If the US is at risk of default, the 10-year Treasury suddenly becomes a special purchase and demand may fall. Or, bondholders can seek rate increases to balance out more risk. In both cases, rates will rise and mortgage rates will follow.

This is not the first time that the US has been in almost this situation. In 1995 and 2011, Republicans controlled Congress under Democratic presidents and tried to use the debt ceiling to push spending. The US trembled at the crisis before the presidents at that time – Clinton and Obama, respectively – reached an agreement with Congress.

If that scenario happens again, the fight could drag on for months before Biden and Congress reach an agreement to avoid default and save consumers from rising interest rates on all types of loans, including mortgage. Meanwhile, the Fed is expected to announce at its meeting of February 1 another rate increase, although it will be smaller than the increase introduced in 2022. Business experts believe that. mortgage rates will continue to fall for now, even with uncertainty over the debt ceiling – all the more reason to look at mortgage rates to see if it’s a good time to buy or refinance.

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