I am in the process of moving, from my native Michigan to the western suburbs of Washington DC. When I closed on my current home in April 2000, I financed the loan at 7.75% apr for 30 years. I am currently qualified to borrow at 6.40% for 30 years. The yield on 30-year US treasury bonds has fallen by a similar amount.
Why do I bring this up? Remember, back in 2000, American politicians were talking up the surplus. Today, thanks to recession, a flat stock market and post-911 spending, the US will probably finish with a deficit in fiscal 2002. But according to a novel theory recently introduced by Senate Majority Leader Tom Daschle, federal deficits cause mortgage rates to rise! So see, tax cuts would increase the deficit, which would increase mortgage rates, which would make new home purchases more expensive, which would hurt working families. Well then, if that is true, why is my lending rate so much more favorable now than it was when the US budget was solidly in the black?
The US does not finance much of its debt with 30 year bonds. In fact, the duration of the national debt (a fancy way of saying the average time to maturity) is just under 5 years. The federal treasury does not contribute very much to the demand for long-term funds. So it should not be surprising to learn that there is essentially no historical relationship between federal borrowing and mortgage rates. In fact, the US did not start to aggressively work down the duration of the debt until the Democrats and Treasury Secretary Rubin came into power!
If Daschle wants to pay down the debt, why would he want to do it in a period in which yields on long-term debt were falling? As anyone who stayed awake in finance 101 knows, prices and yields move in opposite directions, so lower yields mean that it would cost more to retire long-term debt from bondholder’ hands. This would amount to little more than a subsidy paid by US taxpayers to bondholders, who increasingly are foreign investors.
Politicians used to be smart enough to know that they aren’t very smart about economics. Senator Daschle evidently does not feel constrained by his ignorance.
