Monday, August 8, 2011

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

Hand-wringing experts expected consumer interest rates to rise and the economic world to pretty much end in advance of 2012, but after the smoke cleared, investor confidence in U.S. Treasury bonds revealed the U.S. isn't a deadbeat.

by Broderick Perkins
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Deadline Newsroom - Contrary to overwrought 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.

Hand-wringing experts expected consumer interest rates to rise and the economic world to pretty much end in advance of 2012, but after the smoke cleared investor confidence in U.S. Treasury bonds revealed the U.S. isn't a deadbeat. 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.

Whether mortgage rates will continue to fall due to the downgrade is anyone's guess. Between Wall Street's fear mongering collective and Washington, D.C.'s buck-passing political bullies, few seem to have the economic smarts necessary to come up with real answers to cure the nation's ailing economy.

The mortgage interest rate drop came after Standard & Poors went through with its warned downgrade to the nation's credit rating, as it chastised the nation's legislative branch as a dysfunctional family of ne'er-do-wells.

(See Brookings: "Is This Really The Worst Congress Ever?")

S&P made the move specifically because of legislators' political infighting, including the Tea Party's zero-tolerance for compromise and the failure of both sides to add or insist on revenue enhancing taxes to the shaky federal budget agreement, among several other reasons it had cited far in advance of the actual downgrade.

S&P said the toxic behaviors combined to reduce confidence in Washington's ability to get the budget deficit under control -- let along employment, economic growth and fiscal stability.

It's not something S&P and other raters seemed to consider during the run up to the crash, but so be it. Perhaps S&P and other raters are finally getting their house in order. The jury is still out there.

In any event, the downgrade created a panicked 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.

It wasn't as if any of the companies in either index really experienced any damage from S&P's downgrade, but as 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.

So, at least on Monday, mortgage interest rates actually benefited from the economic shenanigans that has the nation embroiled in uncertainty and frustration.

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Broderick Perkins, an award-winning consumer journalist, parlayed 30 years of old-school journalism into a digital real estate news service, the San Jose, CA-based DeadlineNews Group, including DeadlineNews.Com, a real estate news and consulting service and Web site, and the Deadline Newsroom, DeadlineNews.Com's news back shop.

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