As predicted by Treasury Secretary Janet Yellen, on January 19 the U.S. hit its debt ceiling, the maximum amount it can borrow to pay its bills. Reaching the $31.4 billion cap is expected to trigger a standoff in Congress over whether to increase or suspend the limit to help the nation meet its financial obligations.
Congress has modified the debt ceiling 78 times since 1960, so this isn’t completely uncharted territory. What makes this time different are rules recently adopted by House Republicans that make it harder to raise the cap and give Republicans more power over subsequent spending cuts. President Biden has promised to fight any demands for cuts, which could lead to a lengthy battle.
Yellen promised in a letter to Congress last week that the Treasury would take “extraordinary measures,” including temporarily halting investments in some federal pension and disability funds, to keep the U.S. solvent until June. However, without a resolution by then, the U.S. could default on its debt, an outcome Yellen said would cause “irreparable harm” to the economy and have significant ripple effects for consumers.
How does hitting the debt ceiling affect mortgage rates?
Mortgage rates reached a 20-year high this fall in response to the Federal Reserve’s repeated interest rate hikes, which were aimed at curbing inflation. (Even though the Fed doesn’t set mortgage rates, its actions influence them.) Rates started declining in November and averaged 6.15% for the week ending January 19 — a four-month low.
But a standoff over the debt ceiling could reverse the trend. Mortgage rates tend to follow the ups and downs of the 10-year Treasury. Treasury notes are generally considered a fixed-income (or “safe”) investment, since they’re backed by the U.S. government. Mortgage-backed securities, on the other hand, are a higher-risk investment, since they’re based on the value of home loans. When Treasury yields rise, so do mortgage rates, to compensate for the additional risk.
So how does a fight over the debt ceiling affect the 10-year Treasury note? If the U.S. is at risk of default, the 10-year Treasury suddenly becomes a less appealing investment and demand could drop. Or, bondholders could seek increased rates to balance out the greater risk. In both cases, yields would rise and mortgage rates would follow.
It isn’t the first time the U.S. has been in almost this exact situation. In both 1995 and 2011, Republicans took control of Congress under Democratic presidents and tried to leverage the debt ceiling to push through spending cuts. The U.S. teetered on default before the then-presidents — Clinton and Obama, respectively — reached an agreement with Congress.
If that pattern plays out again, the fight will likely drag out for months before Biden and Congress compromise to avoid default and save consumers from soaring interest rates on all types of borrowing, including mortgages. In the meantime, the Fed is expected to announce at its Feb. 1 meeting another rate hike, albeit a smaller one than the aggressive increases introduced in 2022. Industry experts believe that mortgage rates will continue to fall for now, even with the uncertainty over the debt ceiling — all the more reason to keep an eye on mortgage rates to see if it’s a good time to buy or refinance.
SFGate.com and reviewed by Jill Slattery, who serves as VP of Content for the Hearst E-Commerce team. Email her at [email protected].
Source: sfgate.com