Â Â Last Friday the Feds began the purchase program and acquired $7.92 Billion and again today another $7.23 Billion. One would have therefore expected interest rates to have gone down in the last week. Quite the opposite has happened. Interest rates for home loans have shot up by over one-half percent in the last week alone. How can this be?
Â Â When interest rates go down in the U.S. it causes the dollar to go down hurting other world economies. Many of those countries have begun to speak out against the Fed's actions. Many economists in the U.S. fear this new move by the Feds will create overheated inflation down the road. More importantly, the largest of bondholders, like PIMCO, have taken the position now is a great time to sell off their bond holdings while there is someone to buy them all, that being the Federal Reserve Board.
Â Â When bonds sell off it causes the yields to rise and that is exactly what we have seen over the last few days. The yields are now the highest they have been since May of this year. Look at the 1 year chart below of the 10 Year Treasury. You can see that in April of this year the yield on the 10 Year Treasury hit a high of 4% and by early October had bottomed at 2.3%. At the end of the day today the yield stood at 2.91%. That 50 basis point increase took home loan rates from 3.875% to 4.375% very quickly.
Â Â Those wanting to refinance and time the bottom may have missed the boat. However, potential homebuyers will soon be hearing this news and decide to get off the fence and make that purchase they were holding off. The cost of financing will add a tremendous amount to the long term cost of the home. If you have buyers waiting you might let them know not to wait too much longer and get their offer in now.
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