Buried in a 10-page report from Moody’s Analytics detailing the catastrophic economic impact if Congress fails to raise the debt ceiling – for starters, a U.S. default could wipe out 6 million jobs and $15 trillion in wealth – is a line about the mortgage market and home loan rates.
“Treasury yields, mortgage rates, and other consumer and corporate borrowing rates spike, at least until the debt limit is resolved and Treasury payments resume,” the report said on Wednesday, describing the effects of the U.S. defaulting on its debt.
And, it wouldn’t be a short-term spike, said Mark Zandi, Moody’s chief economist and lead author of the report. Rates would remain elevated even after a resumption of payments as investors add a risk premium that would elevate the yields for both Treasuries and the mortgage bonds that track them.
Home-loan rates would “never fall back to where they were previously,” Zandi said. “Since U.S. Treasury securities no longer would be risk-free, future generations of Americans would pay a steep economic price.”
Higher mortgage rates would shrink the size of home loans borrowers can get because lenders measure future monthly payments against income and other debts. Costlier financing for home purchases means higher monthly bills, which translates into smaller mortgages, which could chill housing demand.
So far, the bond investors who control mortgage rates by the returns they’re willing to take for their long-term investments don’t believe the U.S. will default on its debt, gauging by Treasury yields and the home-loan rates that track them. That, despite a pledge by Senate Minority Leader Mitch McConnell that every Republican will vote against it.
The bond market often has an uncanny ability to predict the future. For example, during the 2013 panic known as the “taper tantrum,” when Wall Street lost its mind worrying about the impact of the Federal Reserve’s ending its first bond-purchasing program, mortgage rates started spiking weeks before the Fed’s announcement.
The average U.S. rate for a 30-year fixed mortgage jumped a quarter of a percentage point in the three weeks before then-Fed Chairman Ben Bernanke gave a speech that first cited the possibility of a taper. Following Bernanke’s speech, the rate spiked nearly another percentage point, as measured by Freddie Mac. That year, 2013, also had a debt-ceiling brink.
Now, with one week to go before the Oct. 1 deadline for the debt ceiling, mortgage rates are posting a muted response. The average rate for a 30-year fixed mortgage edged up to 3.14% on Thursday, following the Federal Reserve’s Wednesday announcement that it would begin tapering asset purchases “soon,” from 3.07% on Tuesday, according to the Optimal Blue Mortgage Market Indices. That’s the highest level since July 13.
The 10-year Treasury yield rose to 1.4% on Thursday, the highest in about two months.
Raising the debt ceiling would fund the federal government’s ability to pay for past spending, most of it accrued during the former administration. The federal debt grew by $5.4 trillion from August 2019 – the last time the limit was suspended under President Donald Trump – to Jan. 20, 2021, when Trump’s term expired, according to the nonpartisan Congressional Research Service. It has grown by another $675 billion since President Joe Biden took the oath of office, according to the CRS analysis.
The government would shut down on Oct. 1 and the U.S. would be unable to pay its bills sometime in mid-October if the Senate fails to follow the House of Representative’s lead in passing legislation to raise the cap.
The Treasury would use “extraordinary measures” to pay debts after that deadline, though its funds would be exhausted within weeks, according to Treasury Secretary Janet Yellen.
That would result in the U.S. defaulting on its debt for the first time in history.
A U.S. default “would likely cause irreparable damage to the U.S. economy and global financial markets,” Yellen said in a letter to Congress earlier this month.
“At a time when American families, communities, and businesses are still suffering from the effects of the ongoing global pandemic, it would be particularly irresponsible to put the full faith and credit of the United States at risk,” she said.
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