Well, it has finally started happening! Mortgage rates in Denver have been climbing steadily for the last month. That would make the mortgage rates in Denver and in Colorado the highest we have seen in a year and almost the highest we have seen in two years.
So you ask what has caused this to happen?? The Bond market is trading lower on news that Japan reported better than expected economic data. Like we saw last week with New Zealand and Australia, global economic growth and inflation risk is causing foreign countries to hike interest rates. And as countries hike interest rates, more attractive yields abroad is causing money to be siphoned out of the US Bond market.
Here’s an important story to pay close attention to – in the past we discussed the Yen carry-trade, where traders borrow money tied to the Japanese Yen and reinvest that money in higher yielding investments in countries like the US or Australia. So why is this important? The higher rates offered in the US are attractive to Japanese investors because rates in Japan are far lower. So many Japanese investors are big buyers of US Treasuries and Mortgage Bonds. And while it may seem like getting 5% in the US instead of 1% in Japan is a good and simple strategy there is another moving part that needs to be considered, which is the currency exchange rate between the US and Japan. Lately, the US Dollar is losing ground in value versus the Japanese Yen because the percentage loss of the Dollar vs the Yen has been greater than the additional yields offered in US Bonds, many Japanese have decided to unwind their holdings in the US. This is putting additional selling pressure on our Bond market. Japan is presently the largest holder of US Mortgage Bonds.
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