Debt Crisis: Higher Mortgage Rates, Lower Stocks
By GENCO CAPITAL
As Congress continues to battle over the debt ceiling, how will this effect our finances?
As the debt ceiling debate in Congress continue, the potential shockwaves getting ready to pulse through the markets are growing stronger. The debt ceiling resolution is a ticking time bomb, and its delayed explosion could send Treasury rates skyrocketing. As the rates surge, so will mortgage rates, posing a major threat to the possibility of owning a slice of the American dream. The potential ramifications cannot be understated.
The government has always raised the debt ceiling in the past – and likely will again. What matters here is the amount of time it takes to do so. The longer the resolution to raise the debt ceiling is pushed back, the higher Treasury rates will jump. But why does this matter to you? Well, it all boils down to confidence—investors’ confidence in the United States’ ability to honor its debt obligations. If that confidence wavers, debtholders will demand higher rates to compensate for the perceived risk. And guess what? Those rising Treasury rates have a direct impact on mortgage rates, pushing the dream of affordable housing further out of reach.
It’s been difficult enough for young people to find their first home – high interest rates, little inventory on the market, fierce competition among buyers – but with Treasury rates poised to take off like a rocket, the effects will reverberate through the real estate market. As mortgage rates soar, homebuyers will be left grappling with sky-high borrowing costs, making homeownership an even more distant dream.
Another major issue that could emerge from a debt default is a credit downgrade for the US. If a resolution to raise the debt ceiling is not reached before the June 1st deadline that Secretary Yellen has set, then it could result in a downgrade from the rating agencies. This has happened once before in 2011.
The U.S. credit downgrade in 2011 had a major impact on U.S. stocks. Following the downgrade, the Dow Jones Industrial Average (DJIA) experienced a drop of over 600 points, one of the largest single-day point drops in history. The S&P 500 and Nasdaq Composite also saw significant declines. The downgrade raised concerns about the U.S. government’s fiscal sustainability and caused investor uncertainty. It led to increased market volatility and turbulence in other asset classes. While markets eventually recovered, the event highlighted the importance of credit ratings and fiscal policies in shaping investor sentiment.
How do we navigate this? Keep cash on hand to take advantage of opportunities that could arise and diversify your portfolio. While Treasury rates may be on the rise, other investment opportunities may emerge over the next 3-6 months. A significant drop across stocks will present tremendous opportunities that will reward long-term investors.
In the meantime, keep a long-term mindset and focus on dollar-cost averaging. Certain opportunities are already popping up, like CD rates. Search around for places paying you a nice yield for your cash. Fidelity is paying well over 5% on their CDs. We could see 6% interest relatively soon.
On its face, the debt ceiling seems like another risk that could send stocks lower but as investors, this is nothing more than a great opportunity for buying. We’ll continue to watch for new developments on this front.