How Government Borrowing Can Influence Mortgage Rates
If you are a reader of this blog’s ‘rate update‘ posts then you may be wondering why attention is paid to the US Treasury and their biweekly auctions. The reason has to do with an economic principle called the “crowding out effect“.
According to Wikipedia ‘crowding out’ is “any reduction in private consumption or investment that occurs because of an increase in government spending.“ In this case however we’re applying this principle to borrowing instead of spending.
When the US Treasury sells notes, bonds, and/ or securities they create a substantial supply of fixed-income securities that compete with the private sector (including mortgage-backed bonds) for investment dollars.
There is a growing fear amongst market analysts that as the US deficit balloons the treasury will have to begin selling more and more fixed-income securities in order to generate enough cash to finance the government’s expenditures. As the supply of the treasury auctions increases they will absorb more and more of the market’s demand for fixed-income securities.
Yet, private sector entities, including sellers of mortgage-backed bonds (MBS’s), will still need to raise capital so they can fund their own operations. In order to do this in an environment where the US Treasury is “crowding out” other players they’ll be forced to offer higher and higher interest rates in order to attract demand.
This is the dynamic for how the “crowding out effect” can impact mortgage rates. In ‘rate update’ we’ll be keeping a close eye on the size of the auctions as well as the level of foreign participation (which is a gauge on demand).
If the size of announced auctions is more than expected then this would place upward pressure on mortgage rates and vice versa. If foreign demand in US Treasury auctions is lower than expected then this also would place upward pressure on rates and vice versa.
Posted: February 3rd, 2010 under Economics & Interest Rates.
Tags: how US deficits impacts mortgage rates, the crowding out effect and mortgage rates, US deficit spending and mortgage rates, US deficits and mortgage rates
Comments
Pingback from My Mind on Mortgages » Rate Update February 10, 2010
Time February 11, 2010 at 7:11 am
[...] mortgage rates. As the deficit continues to widen there may be more of this to come (click HERE to understand how government borrowing impacts mortgage rates). Oh yea, and today the treasury [...]
Pingback from My Mind on Mortgages » Rate Update March 24, 2010
Time March 24, 2010 at 8:26 am
[...] average demand. Corporations have also been adding to the heavy debt supply as of late. Click HERE to understand how additional debt supply can cause mortgage rates to [...]
Pingback from My Mind on Mortgages » Rate Update March 25, 2010
Time March 25, 2010 at 8:02 am
[...] Traders are finally pricing in the huge supply of government debt which is coming down the pike. The US Government is on pace to rack up a $1 trillion budget shortfall this year which will need to be financed through the US Treasury. You can read about this effect HERE. [...]
Pingback from My Mind on Mortgages » Rate Update March 26, 2010
Time March 26, 2010 at 7:52 am
[...] auctions since the beginning of the year but this weeks marks the first time they’ve had a substantial impact on borrowing costs. This chart in today’s Wall Street Journal does a nice job of summarizing [...]
Pingback from My Mind on Mortgages » Rate Update April 26, 2010
Time April 26, 2010 at 7:45 am
[...] supply to the market we track the level of demand for these notes. Strong demand bodes well for mortgage rates and vice versa. Expectations for this week’s auctions are strong so anything less than that [...]
Pingback from My Mind on Mortgages » Rate Update May 13, 2010
Time May 13, 2010 at 8:01 am
[...] given the fears surrounding the EU debt crisis. Strong demand for US debt securities is a good sign for mortgage [...]
Pingback from My Mind on Mortgages » Planet Money Does Piece on Crowding Out Effect
Time July 6, 2010 at 8:31 am
[...] month or so ago I wrote this post on the impact of government borrowing on interest rates. Basically, as the government borrows [...]
Pingback from My Mind on Mortgages » Rate Update July 13, 2010
Time July 13, 2010 at 8:22 am
[...] today’s auction probably won’t draw as much attention at these low rates. Click HERE to understand how treasury auctions can impact mortgage [...]
Pingback from My Mind on Mortgages » Rate Update July 26, 2010
Time July 26, 2010 at 8:21 am
[...] is back on the auction block this week with $104 billion in 2, 5, and 7 year notes. Click HERE to understand how government borrowing can impact mortgage rates. I fully expect demand to remain [...]
Pingback from My Mind on Mortgages » Rate Update September 8, 2010
Time September 8, 2010 at 7:49 am
[...] $21 billion in 10-year notes. Yesterday’s 3-year auction was met with strong demand which is a good sign for mortgage [...]
Pingback from My Mind on Mortgages » Rate Update October 25, 2010
Time October 25, 2010 at 8:02 am
[...] Despite $109 billion of new debt supply from the US Government this week mortgage rates are managing to start the week better off. The US Treasury will kick-off the week with $10 billion in inflation protected 5-year notes. If demand for US debt is weaker than expected like it was two weeks ago we could see rates get pressured slightly higher. [...]
Pingback from My Mind on Mortgages » Rate Update November 8, 2010
Time November 8, 2010 at 8:59 am
[...] focused on US Treasury auctions. The US Treasury is set to auction $72 billion this week. Click HERE to understand how government borrowing can impact mortgage [...]
Pingback from My Mind on Mortgages » Rate Update November 9, 2010
Time November 9, 2010 at 8:59 am
[...] auctions $24 billion in 10-year notes later today. Demand is expected to be strong which will help keep rates low. Should demand for this round of US debt fall short of expectations we could see rates get [...]
Pingback from My Mind on Mortgages » Rate Update November 19, 2010
Time November 19, 2010 at 9:19 am
[...] to auction $99 billion in 2-year, 5-year, and 7-year notes so mortgage-backed bonds will have to compete with the government to find [...]
Pingback from My Mind on Mortgages » Rate Update February 8, 2010
Time February 8, 2010 at 6:58 am
[...] have yet to have a material impact on mortgage rates we maintain the threat exists. Click HERE to understand how government borrowing can influence mortgage [...]