CNC Mortgage Blog

By Carlos Gutiérrez

I certainly don’t have the crystal ball that allows me to see what will happen to mortgage interest rates. This week the situation in Egypt is affecting interest rates for US bonds. All countries issue bonds to finance their debt. The future of the Egyptian government is uncertain so investors are unwilling to buy bonds that are emitted by that government and investors who already have those bonds are nervous and sell them. Not only are Egyptian bonds affected, Egypt is considered an “emerging market” by the investing community so all “emerging market” bonds are affected. Those emerging markets include Korea, India, Brazil, Mexico and many other nations. Although many investors are selective, others just have all bonds in one single pocket.

So people do not invest their money in emerging markets plus they have the cash from the sale emerging market bonds. They are sitting on cash. Idle cash looses value. Their portfolio guidelines indicate that they should invest in bonds not other type of financial instruments. What is the safest immediate alternative? Bonds emitted by the government of the United States.

And what happens when people want to buy bonds that are perceived to be safer? They are willing to pay a higher price for the bonds. The price of bonds and the yield (interest rate) on bonds move inversely, so as the price of the bond goes up, the interest rate goes down.

A few weeks ago unrest in the European markets drove interest rates down because investors worried about Ireland, Greece, Portugal and generally the Euro as a safe currency.

Economist s have grouped countries by acronyms that help people to remember. The group of European countries that have been in financial difficulties have been called the PIIGS for Portugal, Ireland, Italy, Greece and Spain. One tier of emerging markets is the BRIK for Brazil, Russia, India and Korea. A lower tier of the emerging markets have been grouped into the CIVETS for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.

Until the situation in Egypt is settled I would expect mortgage interest rates to remain low. I dare to predict that as the world economy improves, the US housing market bottoms out and US industry speeds up interest rates for mortgages will go up over the next few months.