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Interest Rate News for Thursday, September 2, 2010
Mortgage Rates Hit New 50-Year Low
By Zachary Miller
Today mortgage company Freddie Mac announced that the average nationwide 30-year fixed mortgage rates fell again this week to yet another 50 year low. Nationally, the average rates fell .04% to 4.32% (an all time low since they started tracking rates back in 1971).
Although there are many factors that contribute to the fluctuations in mortgage rates, one key element driving down rates, as of recently, is poor performance in the stock market. In the time spanning from the beginning of last week into early this week, the Dow Jones Industrial Average (DJIA) dropped nearly 200 points closing below 10,000 points at one time. As stock performance declines, investors flee the equities market and head for the U.S Bond Market. This market is a safe alternative to the stock market because the United States government backs these investments and the default risk in miniscule making them virtually riskless. However, the potential return on these bonds are less then the equities market because with less risk comes less reward. Since bond prices and bond interest rates are inversely related, when people flee to the bond market, demand rises, causing bond prices to increase and interest rates to drop. This affects mortgage rates because statistical data has shown that, in the past, mortgage rates have the tendency to follow the 10-year bond interest rates; as interest rates on 10-year bonds fall, so do mortgage rates. The relationship between these two investments exists because they are closely related in terms of time to maturity and assessed risk.
With that being said, the DJIA gained 255 points yesterday alone and continues to gain more ground today. If performance continues to rise and people gain more confidence, we could potentially see investors move back to the stock market, causing bond interest rates to rise and possibly forcing mortgage rates higher.
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