How The Credit Downgrade Will Effect Interest Rates

Now that the country has lost its stellar credit rating many people are wondering what, if any, effects this will have on pivotal U.S. markets. Many investors are hesitant to leave their money in stocks, while others are cautiously riding out the storm.

A lower credit rating for government bonds suggests there is an increased risk in lending money to the government. If investors make drastic moves to withdraw from the market, Treasury prices could reverse; sending the interest rate on Treasury bonds through the roof.

What About The Consumers

The interest rate on treasury bonds influences the interest rate in key markets such as mortgage and credit card lending. In general, most mortgage interest rates are correlated with the price of the Treasury bond. Meaning, if the Treasury bond interest rate increases, so does the interest rate associated with most mortgage loans.

The drop in mortgage interest rates was largely influenced by inflation. As inflation set in, the value of the Treasury bonds dropped, taking it with it the high mortgage interest rates. Although inflation is a sign of economic illness, it did provide the low mortgage interest rates we have enjoyed for the last few years.

Now that the U.S. credit rating has been lowered, the Treasury bond interest rate is likely to increase to an extent. As mortgage rates rise, they are expected to remain relatively low. The problem is twofold: (1) potential home buyers may not be able to obtain as low of an interest rate as they would have 2 years ago and (2) homeowners under unconventional loans may see an increase in the mortgage payments as interest rates increase. Adjustable rate mortgage owners should prepare for the upcoming increase in interest rates, as this will most definitely increase their monthly mortgage payment. People under adjustable rate mortgages need to forecast whether they can afford to maintain a higher mortgage payment to prevent the risk of foreclosure.