US Treasury prices fell on Wednesday, sending benchmark yields to eight-month highs, after an auction of 10-year notes heightened concerns about the cost of financing the burgeoning U.S. budget deficit.
It was the first test of the government's long-term borrowing ability since investors began to wonder last month whether the United States' prized AAA credit rating may be living on borrowed time.
This continues a trend now more than a month of the U.S. Treasury bond rate shooting up. Today's offering is more evidence that the market will make the government pay to borrow the amount of money that President Obama is determined to borrow.
To put things into perspective, at the end of April, Ten Year U.S. Treasury Bond rates were at about 3%. They are now trading just below 4%. With this, mortgage rates have gone to just below 5%, to about 6%.
The short term effect will mean a very bloody month of June for real estate. Between long waits and exploding interest rates, I expect millions of loans to blow up as locks expire. This will be clear in both mortgages closed, which will plummet, and in real estate prices, which will take a massive hit this month.
In the more intermediate term, I expect the benchmark ten year U.S. Treasury bond to hit 5% before the end of the summer, if not sooner, unless the President announces he is reversing course on some of this spending. The bond offering today is only the beginning and this bond offering is saying the same thing they've all said recently. The bond market is telling the president that borrowing trillions will be very expensive.
The ramifications for the entire economy will be massive. A ten year U.S. Treasury bond at 5% means mortgage rates at 7%. That means the average borrower would pay about $400 a month more on a $200,000 mortgage over their lows at 5%. That would trigger further declines in real estate values, increases in defaults, and of course increases in foreclosures.
This would also translate into higher rates on car loans, student loans, business loans, and frankly all other loans. Raising borrowing costs somewhere around 2% means whatever jobs will be "saved or created" by the stimulus, will be overwhelmed by the lost jobs that higher borrowing costs will mean.
If the Republicans have any political savvy, they will coordinate a full attack on Obama's economic policies as soon as the Treasury hits 5%. By then, there will be no getting around what his policies have created. About two in three people on their own home or property (condo, two unit, etc) Even if they aren't now buying, selling or refinancing, a homeowner is acutely aware of what higher mortgage rates mean to them. Many homeowners are aware of what property values are doing in their own areas. As they see property values falling, they will be able to make the connection from that to rising mortgage rates.
Furthermore, the move of the treasury from 3% to 4% is a business story. Once it moves to 5% it is a news story. The public will be engaged. Furthermore, it is a simple story to tell. The president borrowed money we don't have. That raised all borrowing costs. Now your car loan, student loan, home loan, and business loan are more expensive.
If the Republicans are really politically savvy, they will put the fear of God into all. They need to get on every media that will have them and make the case that unless Obama's domestic agenda is stopped, interest rates will continue to go up until our economy collapses. That's not so far from reality. Today's bond offering was only $19 billion. Obama wants a trillion plus more. You do the math. Republicans need to get behind a populist movement to repeal the rest of the stimulus.
This is also an easy story to tell. The stimulus hasn't created any jobs. It has, however, raised rates, by then, two full percentage points. That hurts the economy and causes us to lose jobs. In order to get out of the recession, we need borrowing costs minimized. The only way to minimize them is to repeal the stimulus. By doing so, the President's entire agenda, platform, and economic policy would be wholly rejected. To do this, the Republicans would need to create a grass roots revolt. Of course, nothing is as motivating to a revolt as seeing your mortgage rate go up 2% in the span of four months.