Mortgage rates will skyrocket if US defaults on debt, Moody’s report says

Buried in a 10-page Moody’s Analytics report detailing the catastrophic economic impact if Congress doesn’t raise the debt ceiling – for starters, a US default could wipe out 6 million jobs and $ 15 trillion of wealth – is a line in the mortgage market and mortgage rates.

“Treasury yields, mortgage rates, and other consumer and corporate borrowing rates rise, at least until the debt limit is resolved and Treasury payments resume,” said Wednesday. report, describing the effects of the US default on its debt.

And, it wouldn’t be a short-term peak, said Mark Zandi, chief economist at Moody’s and lead author of the report. Rates would remain high even after a resumption of payments, as investors add a risk premium that would raise the yields on Treasuries and the mortgage bonds that follow them.

Mortgage rates “would never fall back to where they were before,” Zandi said. “As US Treasury securities would no longer be risk free, future generations of Americans would pay a high economic price. “

Higher mortgage rates would reduce the size of home loans borrowers can get, as lenders measure future monthly payments based on income and other debt. More expensive financing for the purchase of homes means higher monthly bills, which translates into smaller mortgages, which could dampen the demand for homes.

So far, bond investors who control mortgage rates by the returns they’re willing to take on their long-term investments don’t believe the United States will default on their debt, judging by the yields of the Treasury and the mortgage rates that follow them. . This, despite the commitment of Senate Minority Leader Mitch McConnell, that every Republican will vote against.

The bond market often has a strange ability to predict the future. For example, during the 2013 panic known as the ‘taper tantrum’, when Wall Street lost its mind worrying about the impact of the end of its first bond buying program by the Federal Reserve , mortgage rates began to climb weeks before the Fed’s announcement.

The average US rate on a 30-year fixed mortgage jumped a quarter of a percentage point in the three weeks leading up to the speech by Fed Chairman Ben Bernanke, who first raised the possibility of a cut . After Bernanke’s speech, the rate climbed nearly another percentage point, as measured by Freddie Mac. That year, 2013 also saw a debt threshold.

Now, a week away from the October 1 deadline for the debt ceiling, mortgage rates are showing a mixed response. The average rate on a 30-year fixed mortgage edged up to 3.14% on Thursday, after the Federal Reserve announced on Wednesday that it would start cutting asset purchases “soon,” from 3.07 % Tuesday, according to the Optimal Blue Mortgage Market Indices. This is the highest level since July 13.

The 10-year Treasury yield hit 1.4% on Thursday, the highest in about two months.

Raising the debt ceiling would fund the federal government’s ability to pay past spending, most of which accrued under the former administration. Federal debt rose $ 5.4 trillion from August 2019 – the last time the limit was suspended under President Donald Trump – to January 20, 2021, when Trump’s term expired, according to Congressional Research Non-partisan service. It has grown another $ 675 billion since President Joe Biden was sworn in, according to CRS analysis.

The government would shut down on October 1 and the United States would be unable to pay its bills by mid-October if the Senate did not follow the lead of the House of Representatives in passing legislation to raise the cap.

The Treasury would use “extraordinary measures” to pay debts after this deadline, although its funds were exhausted within weeks, according to Treasury Secretary Janet Yellen.

This would cause the United States to default on its debt for the first time in history.

A US default “would likely cause irreparable damage to the US economy and global financial markets,” Yellen said in a letter to Congress earlier this month.

“At a time when American families, communities and businesses are still suffering from the effects of the ongoing global pandemic, it would be particularly irresponsible to endanger the confidence and credit of the United States,” she said. .