Rate Update December 8, 2010

Mortgage rates are worse today.

Mortgage-backed bonds have dipped sharply over the past 24 hours pushing rates up by .25%-.375% across the board.  Hopefully you took the advice of ‘rate update’ yesterday morning and locked in before rates rose.

The markets are showing concern over the money creation that will result from QE2 and the tax cut extension.  The Fed is effectively creating $600 billion in additional money supply through QE2 and the tax cut extension is expected to add $700 billion to the Federal deficit.

As I blogged about back in August of 2009, an increase in the money supply will lead to inflationary pressure, and hence higher interest rates, when economic activity picks up.

The US Treasury is back on the auction block selling $21 billion in 10-year notes.  I would expect the higher yields to attract demand and likely stabilize rates at current levels for the time being.

Current outlook: neutral