Why are rates rising?

From My “Ask The Expert” column in the OriginationPro update.  Sign up at www.OriginationPro.com

Ask The Expert

I read last week about the client who thought that rates were going to 2.0%. As strange as that sounded–I was not expecting rates to go up from here. What happened? Originator from Arizona

Well, as I said last week, you can never predict the future of rates. As a matter of fact, by the time you read this, rates could be back down. In my mind there are two things which caused the rise in rates….

  • Better economic news. The employment report was better than analysts expected and right now this is the most important monthly economic report. The amount of jobs created does not point to a strong recovery. But it does not look like a recession either, and the markets certainly were pricing in dire economic news.
  • Better news from Europe. The threat of financial calamity in Europe was hanging over the markets. With a bailout plan in the works, the markets got optimistic. Like our economy, Europe is not out of the woods, but positive news is welcomed by the markets.

As I have been saying, the economy is in better shape than the dire news which was priced into the markets. That is why rates rebounded so sharply when just “decent” news hit the wires. Many were counting on Operation Twist to help push rates down, but the Fed can’t control the markets. This type of “indirect” medicine only works to support a trend–not to fight against one. And if the economy does rebound, the Fed may stop doing the twist anyway.  Dave Hershman


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