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US Debt Downgrade May Affect Mortgage Interest Rates

downgrade of US debtThe coveted AAA debt rating was lost by the US, even though the lawmakers were trying to prevent such an effect. However, the downgrade by Standard & Poor’s was totally unexpected and, therefore, historic.

During the struggle over the country’s debt ceiling three major credit agencies, including Fitch Ratings and Moody’s Investors Service, had warned that in case the Congress didn’t reduce spending far enough, the US faced a downgrade.

A lower US credit rating for the bonds of the government implies that there is a higher risk involved in lending funds to the government, just like a lower person’s credit score shows less reliability of a borrower.

Potential Effect Of Increased Yields On Treasury Bonds

In the first few hours of Monday’s trading the prices for American government debt increased – a sign of grown demand in spite of the downgrade. It is still unclear what can happen in the long period of time. Fitch and Moody’s decided to keep their highest ratings for now, and the lower rating has an unprecedented nature.

The interest rate on bonds could go up in case the Treasury prices reserve course and investors get skittish. Basically, in order to make the bonds more attractive for investors, the rate would increase leading to higher interest rates for consumers. The borrowing rates on some loans including mortgages are usually pegged to the yield, or rate, on Treasury bonds.

Some forms of consumer borrowing are tied directly to the credit rating of the government, though, not all of them. Still, consumers can potentially face some ripple effects.

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