What presidential politics means
to mortgage hunters, CD shoppers
By Greg McBride -- Financial analyst • Bankrate.com

The Treasury market has been hopping for the past week to 10 days, and that could mean mortgage hunters should lock in their rates now. Why? Yield curves, Federal Reserve Board moves and presidential politics.

First, the Fed: Positive economic news came in the form of the core Consumer Price Index released Sept. 15. It showed prices in line with expectations, indicating that the Fed rate hikes have had the desired effect.

The feeling that the rate hikes are done serves as the cue for bond investors to begin moving back into shorter-term Treasuries.

Now, the politics: There has been a growing perception in the bond market that the new administration, either Gore or Bush, would be less focused on eliminating the national debt than the Clinton administration has been.

That perception causes bond investors to reverse the course taken earlier this year when the likelihood of dwindling supply on longer issues led investors to buy up long-term bonds. This drove prices up and yields down to the extent of producing an inverted yield curve.

Because the feeling exists that those long bonds may not disappear, investors are now selling the very bonds bought earlier this year, driving prices down and yields back up. Should this persist, the yield curve is likely to revert to a more normal shape where longer-term maturities yield more than the shorter-term maturities.

Finally, a glut of corporate bond issues has led investors to sell off Treasuries to make room in their portfolios for the new corporate bonds.

All of this has produced increasing yields on the long end of the curve and falling yields on the shorter end, as investors dump long-term Treasuries and buy shorter-term Treasuries.

Going forward, the reversal on the long end could drive fixed mortgage rates higher. Fixed mortgages track the 10-year Treasury yield -- one of those issues that investors bought up earlier this year but have now begun to sell off. Fixed mortgage rates are 75 basis points off the high they reached May.

With rates unlikely to go lower, now is the time for mortgage shoppers to lock in.

This should also spell the beginning of the decline in short-term CD yields, which have hung on quite nicely in recent weeks as the yields on longer term CDs started to pull back.

Indeed, the volatility factor points to that as declining yields outnumbered increasing yields 11-to-1 this week, easily the largest margin since the yields peaked this summer.

While short-term CD yields presented opportunity to still lock in over the past few weeks, those seeking optimum yield will want to get off the fence now. Those waiting to roll over existing CDs have no need to panic, as the pullback will be gradual, but likely sustained.

Although declining yields outnumbered rising yields so dramatically this week, the number of institutions cutting yields were still in the minority compared to those that left rates unchanged.

What's more, the impact upon the Bankrate.com National Index was negligible. The fact remains, despite a pullback in CDs, the yields now and for the next couple months will still be better than at any time in 1998 or 1999.

The analysis presented here is based on national economic data and the proprietary Bankrate.com National Index. Since 1982, Bankrate.com and its predecessor, Bank Rate Monitor, have been surveying financial institutions and gathering rate information about mortgages, credit cards, CDs, checking accounts and other financial products. The Bankrate.com National Index is protected under copyright. Media outlets seeking additional data or commentary, please contact Greg McBride.

-- Posted: Sept. 22, 2000