The Debt Ceiling and Mortgage Rates

Sovereign Lending Group prides ourselves on our service, reputation, and product line up. But that doesn’t mean, of course, that we don’t keep our eye on offering competitive pricing, mortgage rates, and the economy in general. Overall mortgage rates were down last week, based on some optimism that the Federal Reserve’s actions are having the desired impact on inflation, and that is good news for our borrowers.

But that isn’t what is grabbing the headlines. The U.S. reached its statutory debt limit of $31.4 trillion on January 19, prompting a series of extraordinary measures to avoid a default on government debt. While many view it as political jawboning, and that “they’ll figure it out,” financial markets, which include mortgage rates, could be impacted by Congress’s stalemate.

The Treasury could just ignore Congress and issue notes and bonds with coupons well above current yields. It is important to know that reducing the deficit is not the same as reducing the debt. U.S. debt continues to climb into the stratosphere.

The United States has a unique advantage in the global economic system: the U.S. dollar is considered the global reserve currency and as such lends stability to the world. Global debt markets use the dollar as a benchmark for much of the issuance of debt, even in other countries with other currencies. The United States has never defaulted, but periodically the debt ceiling, enacted in 1917, is questioned. In fact, since 1960 Congress has had to act 78 times to permanently raise, temporarily extend, or change the definition of the debt limit.

Sovereign’s clients should know that if Congress fails to raise the debt limit, the Treasury will be unable to “print more money” to pay existing bondholders, which would surely spook the markets and threaten the United States long-term prospects. Put another way, the world doesn’t need this. Since the U.S. hit its debt limit, the Department of the Treasury has begun taking extraordinary measures to manage bond payments until Congress can align. They have about 5 months before the U.S. could default.

Our clients should remember that the bond markets, and therefore mortgage rates, don’t like uncertainty. And this is uncertainty on a major scale. Sovereign Lending Group has plenty of other things to focus on, like Freddie Mac and Fannie Mae changing their loan level price adjustments, making sure service levels are superb for every client, and continuing to offer great programs for those buying a home or refinancing. Let’s hope they figure this out.