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Mortgage Rates Rise. Bernanke’s $500 Billion Subsidy Isn’t Working.

Written by Gary North on May 31, 2013

Mortgage rates have risen from 3.5% to 3.8% in the last week.

The Federal Reserve System buys $40 billion in mortgage bonds every month. This greatly adds to demand, keeping mortgage interest rates low. That’s the theory, anyway. But the theory is facing headwinds: rising rates.

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This was not supposed to happen, but it is happening. So, the intrepid reporter searched for an explanation. She came up with one.

Yields on the benchmark note are rising because investors are selling government bonds. That’s largely because minutes of the Federal Reserve’s last meeting showed several policymakers favored slowing the Fed’s bond purchases, perhaps as early as this summer.

The Fed’s $85-billion-a-month in Treasury and mortgage bond purchases have pushed down long-term interest rates. When it slows the bond purchases, interest rates are likely to tick up. That would decrease the value of bonds with lower yields.

But the Federal Reserve has said, over and over, that it will not cut back on bond purchases until the unemployment rate hits 6.5%. It said this last December, when it announced QE3. It repeated this in March. But that’s not good enough for our intrepid reporter. She said that investors are selling bonds. Which investors? She did not say. What statistics prove this? She did not say.

Might long-term rates rise in expectation of price inflation? Austrian economic theory says they will.  But that would mean that the FED is facing price inflation.

Or it could be that borrowers are buying homes or refinancing. That would increase demand for subsidized money, which would raise rates.

Why decide that the right explanation is a group of unidentified sellers of bonds, who are selling because they think the FED will do what it says it will not do — stop inflating?

Anyway, it wasn’t supposed to happen. The FED’s massive flooding of the capital markets with fiat money was supposed to push long-term rates down, not up.

The market is filled with surprises. It keeps surprising Bernanke.

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One thought on “Mortgage Rates Rise. Bernanke’s $500 Billion Subsidy Isn’t Working.

  1. Unhappy says:

    A little raise in mortgage interest rates spooks people who were thinking about buying. They now think we better buy a house QUICK before rates go up even more!

    Mission accomplished, more houses are bought……..for a while.

    The rates will go back down. Have no fear. More money will be printed. The economy is not recovering. And since there is no inflation, we "know" that this time is different. Money printing no longer causes inflation and if it should then the Fed will fix it………yeah right.