HomeLoans Blog

Since November 2, when the Federal Reserve announced its intention to increase inflation, based on the idea that higher inflation is needed to kick start the economy and recovery in employment.

Many initially thought that interest rates would improve initially because of the impact of the Federal Reserve's buying power.

The facts are however that mortgage rates have steadily increased, starting with the day of the Federal Reserve announcement. Several other factors have come into play - China's inflation, European debt problems, improving economic reports, improving consumer and producer sentiment, end of the year boom in the stock market, and apparently increasing retail sales.

Most recently the tax cut agreement has pushed rates higher.

Since early November the 30year rate as reported by Freddie Mac has risen from 4.24 to 4.61. This week's rate will be higher as the trend is approaching the 5% range fast.

Many of the impacting factors are good for the economy, but the extent that mortgage rates have increased would not seem to be supported by these positive economic developments.

The chart shows the decline in bond prices since the QE2 announcement. When bond prices decline, interest rates, or yields, increase.

What seems to be carrying the steady decline in bonds is purely momentum. Each report that is supportive of bonds is ignored and each report that is negative for bonds has an exaggerated market reaction.

Many analysts think that bonds are currently undervalued, meaning that rates could rebound - to some extent. The question is when.

Have we hit the upper range for interest rates?

Each day I think we have, but each day as rates continue higher, it is plainly shown that we have not yet reached the top.

And today the news of Senate passage of the tax bill sent the bond market even lower. Wow!