How foreign investors influence domestic mortgage rates

I’ve covered the topic before on ‘rate update‘ but I thought I would write a small blurb this morning because the WSJ had an interesting article on the topic.

As you may be aware the US sells a lot of it’s debt to foreign investors around the world.  When I say “debt” I mean US Treasury debt (debt secured by the government), mortgage-backed bonds (which directly influence mortgage rates), and other forms such as corporate debt.

For many years the US has relied on foreign investors to purchase our debt because we have spent more money than we’ve earned and/ or saved.  Since there has traditionally been strong demand for US issued debt interest rates have managed to stay low.  But there is growing fear that foreign demand may begin to weaken because of the growing national debt & the emergence of other economies (and their currencies) in the global market.  Should these fears come to fruition we would undoubtedly see long-term interest rates rise.

And according to Deborah Lynn Blumberg’s article in this morning’s WSJ online edition it may be more and more difficult to track foreign demand.  In the article she explains that more and more foreign buyers are shifting the manner in which they place bids on US debt.  Therefore, it is more difficult for analysts to differentiate who is a foreign or domestic bidder.  This has the potential to create uncertainty in the debt markets which would not be good for mortgage rates.

Thus far, the ever-growing size of the US treasury debt auctions has not had a major influence on long-term interest rates (including mortgage rates) but at the pace the US government is issuing debt (aprox. $120 billion every 2 weeks) industry analysts will have to try and make sense of it all with less information.