Real Estate Market

Mortgage rates eye of Wall Street storm after S&P downgrade

Contrary to expectations, mortgage rates moved down Monday, Aug. 8, the first business day after Standard & Poors downgraded the United' States credit rating from AAA to AA-plus.

Most experts expected rates to rise, but unexpected investor confidence in U.S. Treasury bonds, following the downgrade, had the opposite effect.

Whether mortgage rates will continue to fall due to the downgrade is anyone's guess. Between Wall Street and Washington, D.C. few seem to have the right answers for the nation's ailing economy.

Erate.com reported the average annual percentage rate (APR) on conforming, 30-year, fixed-rate mortgages (FRMs) was 4.61 in its Aug. 2 report. By midday Aug. 8, the rate was down to 4.49 percent.

The rate drop came after Standard & Poors went through with its warned downgrade of U.S. S&P said it downgraded the nation's credit rating specifically because legislators' political infighting and failure to add revenue enhancing taxes to the federal budget agreement, among other reasons, reduced the rater's confidence in Washington's ability to get the budget deficit under control.

The downgrade created a sell-off on Wall Street as the DOW Jones Industrial Average plunged 5.6 percent, falling some 630 points, to about 10,800, the lowest its been since the fall of 2008 and virtually matching the sixth largest one-day decline in DOW history.

The larger Wilshire 5000 lost $1 trillion on paper, falling 891 points, its third largest decline ever.

But while investors leaped from the closing windows of opportunity on Wall Street, others flocked to the bond market, pushing prices up and yields down. Mortgage rates are tied to bond yields and often move in lockstep with them.

On Aug. 8, the price of the 30-year U.S. Treasury bond jumped more than 3 points, while the benchmark 10-year note's price rose nearly 2 full points, and the 7-year note was up by more than a point.

The 30-year bond on Monday was yielding 3.69 percent, down from a Friday close at 3.85 percent, as the 10-year Treasury yield dropped from 2.57 percent to 2.36 percent, taking mortgage rates along for the ride.

The flight to the very Treasury bonds S&P downgraded, was nevertheless a flight to quality.

Government bonds typically represent the rate at which investing in them is considered risk-free, and, at $9.3 trillion, Treasury bonds is one of the deepest investment markets offering easy to buy and sell investments.

 

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