Rates up, down and all around


Contrary to some conspiracy theorists out there, interest rates are not lowered based on banks needing more business OR rise because of too much business. If this conspiracy theory isn’t true, what does cause rates to rise and fall?


Interest rates move on a daily basis thanks to movement in financial markets – particularly mortgage backed security bonds. Just as stock values move up and down on earning reports, job market outlooks, etc., bond prices fluctuate just like stocks can.

As discussed in a recent post on this blog, statements by the Federal Reserve (or other government agencies) can impact interest rates. Interest rates are also impacted by what is taking place in the other financial markets. This is exactly what happened in May and June.

– during the month of May, stock prices were setting all time highs. As stocks do well, investors pull money out of bonds and put them into stocks. As money comes out of bonds, their values go down, and interest rates go up.
– with the trend already moving in the direction of a higher interest rate market, the Feds released a statement that their bond buying program would be ending relatively “soon.” With the government no longer buying bonds, it would lower their values. In anticipation of this coming change, the statement pushed bonds values way down and shot interest rates up dramatically in the early part of the summer.

How did interest rates fare in July? Interest rates not only flattened out, but also improved a little in the month of July. Why? The market stabilized after the Feds released another statement backtracking a little on their previous comments. Rates were also helped by weaker than expected economic news and job reports.

From these examples, we can see what really impacts interest rates:

1. as bond prices increase, rates decrease, and vice-versa
2. bad economic news that hurt stocks typically help improve interest rates
3. unexpected comments from government agencies can have quick and strong impacts on rates

This is one area where the conspiracy theory isn’t accurate. Now about Roswell, New Mexico…



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