Bond Trends 2009-Week 23: Refi Now?

One big misconception is that mortgage rates are tied to the federal funds rate. The federal funds rate does not move mortgage rates in the short term. If you are deciding whether or not to refinance it is better to look at the yield on the 10 Year US Treasury bond. Many factors determine the interest rate on debt such as the risk free rate of return, inflation, length to maturity, and other factors. Supply and demand is one of the most important things to evaluate because this drives the yield up and down on the 10 Year US Treasury bond. With the recent rallies in the stock market and increased consumer confidence, we are starting to see more risk taking. This is reducing the demand in the US Treasury bonds which is usually considered a safe haven during uncertain times. The government intervention trying to restart the economy from recession has created more volatility and uncertainty in the market. The recent government surge in debt has poured more supply of US Treasury bonds on the market and it remains to be seen if this will cause the yields to rise more quickly. Inflation has been almost non existent since the labor market has been performing so poorly. Without more pressure from wages and employment, it is likely inflation will not become a factor in the short term.
The Bond Trends column tries to provide some insight towards the direction of the yield on the 10 Year US Treasury bond. According to historical prices from Yahoo Finance, the yield starting at the beginning of 2009 was at 2.42%. The yield has steadily moved higher up to 3.71% at the start of week 23(June 1st). Even though interest rates are moving higher, interest rates on a historical level remain lower than average. If you are thinking about refinancing now, it is best to get multiple quotes from different lenders. Many sites like www.fundstart.org can connect you with different lenders that will provide you free quotes. I would not suggest trying to time the market because that many times ends up in a losing situation, but it is important to have some insight in the direction of interest rates and how that can effect your current situation. These movements in interest rates effect auto loans, home loans, student loans, and almost every other form of long term debt on the market. Bond prices and bond yields also move in opposite directions.