There's a lot of noise out there right now - most of it from Washington D.C. The impending debt ceiling limit is a main topic of conversation (and worry) this week.
What will happen to interest rates if the United States' credit rating is lowered and/or the debt limit is not raised by August 2? Well, that's hard to say... You already know the conventional wisdom and bluster coming out of our political leadership - that rates will rise dramatically on everything, including consumer loans, like mortgages, if the U.S. defaults.
While that might happen, there's another camp who haven't gotten much press and have a far different take. Many financial experts don't agree that interest rates will necessarily rise if the U.S. receives a lower credit rating or even defaults on a few obligations for a day or two. They say rates would have already risen had that been true. (markets typically reflect a forecast of the future)
Their reasoning? Where else are the large institutional and foreign investors going to go to find better bonds than the U.S.? Yes, we have a ton of debt. Yes, we spend more than we take in and that needs to change. But, in today's world our bonds would still be the safest place to invest compared with all other government or corporate bonds. Therefore, our standing relative to the rest of the world still makes us more attractive. As the U.S. goes, so does everyone else...
Food for thought, if nothing else...
Have a great week, everyone! Keep your head down, chin up and keep working! As always, I look forward to working with you and your clients very soon.
Your Partner in Greater Success,
Bill Zimmerman
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