6/11/09-An Overview of Why Rates are Increasing

As you have been hearing, interest rates have been increasing over the past 30+ days and in particular since the 1st of the month. I wanted to give you the “short version,” non technical explanation of what’s going on. Interest rates move with the bond market which is the safe haven for investors. When there is bad news in the economy, investors generally move money from the stock market (which is the more volatile and short term investment). Obviously as the economy slogged through the recession, investors remained cautious and plugged into bonds, keeping interest rates lower. As of today, the Dow Jones industrial average has surged 30% since hitting its 12-year low on March 9. Investors have been shrugging off bad economic news and seeing 'less bad' news as good news. As investors grow more optimistic about recovery, the investments into the Treasury market waned and interest rates have moved higher. The rise is also a result of the massive amount of supply hitting the market. The government has been spending at a breakneck pace and has been selling an unprecedented amount of debt to finance its rescue efforts.

To try to keep a cap on mortgage rates and continue the housing recovery, the Federal Reserve unveiled a program in mid-March to buy back $300 billion of its own debt. The so-called quantitative easing program was launched to jolt the Treasury market with demand and boost prices. The program worked for a while: Mortgage rates fell and refinances surged. But the benefits of the Fed's program were short-lived. And the debt buyback program is beginning to look a lot like the government using a sponge to clean up a flood.