Last week in review
(April 18-22, 2011)

With the U.S. facing tough decisions over its national debt, the credit rating firm Standard and Poor’s (S&P) last week cut its “credit outlook” (not its actual credit rating) on the U.S. from stable to negative. S&P also said the U.S.’s AAA credit rating could be cut within two years, if headway isn’t made in closing the budget gap. This is important because countries have credit ratings, just like individuals.

But what does all this mean?
It’s important to note that the downgrade to the credit outlook was a long time coming. For more information about different countries’ credit ratings – as well as your own state’s credit ratings – check out this Credit Ratings Link.

The last thing the U.S. wants is a credit rating downgrade because that would make the interest expense on the U.S. debt more burdensome. But if this was a long time coming, what sparked the change in outlook? The S&P cited the political divide within Congress as a hurdle to meaningfully lowering the federal budget deficit. Both parties want to lower the deficit, but there is disagreement on how to get there.

How does this issue impact bonds and home loan rates?
The national debt concerns won’t be addressed easily, especially when you remember that the country is approaching the debt-ceiling limit. So in the immediate future, this will make for more volatility in the markets as headlines affect both stocks and bonds. Bonds are in an even tougher spot in the long term – and here’s why:

First, if the U.S. government is successful in taking action to lower the budget deficit and avoid a credit rating downgrade, then we should expect a longer duration of accommodative Fed monetary policy since the Fed doesn’t want an economic slowdown to recreate a “deflationary” environment. If things do slow down significantly, we may start hearing debate for a QE3 (or a third round of Quantitative Easing), which would not be good for bonds and home loan rates.

Second, if the U.S. credit rating were downgraded, it would be bad for bonds. This doesn’t seem likely, but it’s important to understand what is at stake here. The bottom line is that with some extra belt tightening as a result of this issue, we could expect to see slower economic growth in the future, as government spending would have to slow immensely to help close the budget gap.

As you can see in the parallel black lines on the right side of the chart below, bonds hovered in a tight range and were unable to improve much last week due to rising stocks and inflation concerns.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday, April 21, 2011)

This week will be packed with economic reports that can have a big impact on the markets and home loan rates. We’ll talk about these reports next week.   

Economic calendar for the week of April 25 – 29, 2011

How does this all effect you?  Call me and we can discuss;

Paul Wallin, Professional Realtor
208-288-2976