US Debt Limit and Mortgage Rates

It seems like every few years politicians in Washington D.C. enter this perceived state of turmoil about raising the US debt limit.  Some members of Congress threaten to not raise the debt limit and in turn not pay our obligations.  It’s clearly obvious that if the Federal government did not raise the US debt limit that we would face a major problem  – the economy would stall, bond yields and mortgage rates would sky rocket.  However does the mere talk of not raising the debt limit have a negative affect on mortgage rates?  It’s definitely possible as we move closer to the deadline.

Bonds traders and investors by nature are nervous; the slightest bit of negative information and they will sell their bond holdings.  Part of the issue is bonds are expensive; there has been a long term bond rally and for years traders, investors and analyst have been calling for yields to sky rocket and that simply has not happened.  So when negative news comes out bond traders and investors tend to sell quickly.  

As we move closer to October bond traders and investors will be listening to what’s going in Washington DC about raising the debt limit.  One good thing is that we’ve been there and done that when it comes to Washington pretending they may not raise the limit however with the current atmosphere in Washington and an unpredictable President there is a chance this may bring more uncertainty to the market and thus bond yields and mortgage rates will rise until they agree to raise the debt limit.