Mortgage rates will spike if the U.S. defaults on debt, according to a report
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 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.A U.S. default “would likely cause irreparable damage to the U.S.
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