The whole sorry mess in one picture (including chart) by Philip Brewer
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Starting back in about 2005, the American consumer reached the point that they could no longer service ever-increasing amounts of debt. That led to the housing bubble popping. The result is what you can see in the last datapoint on the graph–less new borrowing in 2007.
Related: $2,540,000,000,000 in USA Consumer Debt - Americans are Drowning in Debt - save an emergency fund - Financial Illiteracy Credit Trap - posts on saving money
More dramatic evidence that changing in the federal funds rate do not lead to similar changes in 30 year fixed mortgage rates. It is true the last few months are very unusual times for the credit market. However, the current lack of correlation is not the exception, the graph clearly shows there is very little correlation between changes in the two interest rates.
Related: historical comparison of 30 year fixed mortgage rates and the federal funds rate - Affect of Fed Funds Rates Changes on Mortgage Rates - posts on financial literacy - Jumbo v. Regular Fixed Mortgage Rates: by Credit Score
For more data, see graphs of the federal funds rate versus mortgage rates for 1980-1999. Source data: federal funds rates - 30 year mortgage rates
On Wednesday of last week the United States 3 month treasury bill yield reached .03%, yet another remarkable chart from the current crisis.
via: No one wants to hold risk … - “I guess this is what a close to systemic financial crisis in the US looks like”
Daily Treasury Yield Rates show that the rate for Friday the 12th of September 1.49%, Monday the 15th 1.02%, Tuesday .84%, Wednesday .03%, Thursday .23% and Friday .99%.
Related: Corporate and Government Bond Yields - Curious Cat Investing and Economics Search - Credit Crisis Continues (April 2008)
Over the last 2 months the yields on bonds have increased the discount rate has continued to decline.
The spread between corporate bond yields and government bonds has decreased a bit as treasury yields have increased 37 basis points compared to just 4 and 6 basis point increased in corporate bond yields.
Data from the federal reserve - corporate Aaa - corporate Baa - ten year treasury - fed funds
Related: Bond Yields 2005-2008 - 30 Year Fixed Mortgage Rates versus the Fed Funds Rate - Initial Retirement Account Allocations
The recent drastic reductions again emphasize (once again) that changes in the federal funds rate are not correlated with changes in the 30 year fixed mortgage rate. In the last 4 months the discount rate has been reduced nearly 200 basis points, while 30 year fixed mortgage rates have fallen 18 basis points.
I have update my article showing the historical comparison of 30 year fixed mortgage rates and the federal funds rate. The chart shows the federal funds rate and the 30 year fixed rate mortgage rate from January 2000 through April 2008 (for more details see the article).
There is not a significant correlation between moves in federal funds rate and 30 year mortgage rates that can be used for those looking to determine short term (over a few days, weeks or months) moves in the 30 year fixed mortgage rates. For example if 30 year rates are at 6% and the federal reserve drops the federal funds rate 50 basis points that tells you little about what the 30 year rate will do. No matter how often those that should know better repeat the belief that there is such a correlation you can look at the actual data in the graph above to see that it is not the case.
Related: real estate articles - Affect of Fed Funds Rates Changes on Mortgage Rates - How Not to Convert Equity - more posts on financial literacy
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From January 2005 to July 2007 the Federal Funds Rate was steadily increased. The rate was held for a year. Since then the rate has been decreasing (dramatically, recently). As you can see from the chart, 10 year bond yields have been much less variable. The chart also shows 10 year corporate bond yields increasing in February and March when the federal funds rate fell well over 100 basis points.
Treasury bond yields are down but a huge part of the reason is a “flight to quality,” where investors are reluctant to hold other bonds (so they buy treasuries when they sell those bonds). Therefore other bond yields (and mortgage rates) are not decreasing. I guessed last month that the data “may well decrease some for both 10 year bonds once the March data is posted” which wasn’t the case. But I was right in “expect[ing] the spread between treasuries be larger than it was in January.”
Data from the federal reserve - corporate Aaa - corporate Baa - ten year treasury - fed funds
Related: 30 Year Fixed Mortgage Rates versus the Fed Funds Rate - After Tax Return on Municipal Bonds