Through the roof

Where is the country’s debt level headed? I’ll give you a hint; see the title of the post. 

That’s right, with the $123 billion auction in Treasury bonds due out this week, the debt level of the U.S. is going to be at the brink of the self-imposed ceiling of $12.1 trillion.  This raises some interesting questions with the first one being pretty obvious.

1. What does this mean? – It means that the government will be out of money to operate.  The government will either shut down OR vote to raise the debt ceiling.  The latter is the much more likely scenario.

2. “The government shuts down.” That sounds bad so how will that affect all of us? – Day to day life will go on as it did before the shut down just like it did the last time there was a shutdown in 1995.  It sounds worse than how it will actually play out.

In theory, the debt ceiling should be a resistant level for government spending. Meaning, if it gets to that point, perhaps it is time to reevaluate some policies.  Sadly, that doesn’t happen when you have the alternative of simply raising the ceiling.

3. How would this affect interest rates and the market?  Now this is perhaps the most intriguing question of all, and the potential affect on mortgage rates would be a negative one.

If the government shuts down and/or the debt ceiling isn’t raised, then United States of America finds itself in a situation where we are maxed out on credit – we have no credit – resulting in a loss of value for U.S. bonds.  This scenario would negatively impact other country’s bond investments, individual’s bond investments, and cause interest rates to rise (as bond prices fall, interest rates rise).

That scenario will likely be avoided by a simple vote to increase the debt ceiling.  That said, the debt ceiling isn’t the only development affecting the trading and value of bonds:

• Bond prices are not only on the wrong side of the 200 day moving average, but are also below the 10, 25, and 50 day moving averages. That means there is no support to hold bond values should the market be given a reason to turn.
• Fascinatingly enough, a “reason” for turning may occur this week as the Feds plan to auction $123 billion in bonds this week.  If the auction buying is weak, expect bond values to drop pushing interest rates higher.

In short, the technicalities of bond trading point toward bond prices falling and interest rates rising. If there ever was a time to lock in a rate for a purchase, or talk to someone about refinancing an existing loan, now is the time. Don’t miss out on these historically low rates hoping they will improve by another 0.125%.  Get started today!