Inflation is a particularly strong driver of mortgage rates. Bond investors know all too well that fixed income securities provide a “fixed” return. Inflation lowers the value of bonds (like U.S. Treasuries) that fall in value, as investors stampede to sell them and look for a higher-returning investment (like stocks). As the prices of U.S. treasuries decline, the government has little choice but to raise interest rates to attract new buyers.
The good news, if there is any in this scenario, is that investors do carry a great deal of clout. If they feel the global (or regional) economy is in peril, they may take their money out of stocks and pop their cash back into the bond market for greater financial safety (especially as the Middle East calms down). With less money in the stock market and more cash in bonds, interest rates should fall and take oil prices down with them.
But that’s a big “if” right now. Inflation is a tough lion to tame, and it doesn’t slow down overnight. Granted, Japan’s crisis will abate, and eventually the Libyan crisis will fall off the front pages of global newspapers and websites. Still, nobody’s circled a date on the calendar for when that will happen, and the uncertainty that goes with these geopolitical events only leads to further instability for oil prices, and by extension, mortgage rates.
The best move to make for mortgage shoppers is to jump on a low rate right now and lock it in before the price of a mortgage goes even higher.