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England and Europe Impact Domestic Mortgage Rates

February 8, 2007 by Scott Kinne

The Bank of England and the European Central Bank left their benchmark lending rates unchanged today. Both alluded, however, to the need for future rate increases and these policies can have a direct impact on domestic mortgage rates.

When strong governments issue debt (i.e. bonds), it is "guaranteed money" and, therefore, risk-free. When nations with risk-free debt talk about raising rates, foreign investors know that a higher rate of return will be available without a corresponding increase in risk.

In order to buy these bonds, global money will often flow out from areas of lower relative returns (i.e. United States) and into areas of higher relative returns (England, Europe).

As traders sell U.S.-dollar denominated bonds, the supply of them increases. and the prices go down. When bond prices go down, the yields go up. Higher yields equates to higher mortgage rates.

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Scott Kinne

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NMLS ID #182351
Office: 703.293.6146
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Fax: 571.317.2478
skinne@fhmtg.com

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