Lowest Interest Rates Ever, Thanks to You

Interest rates for home loans are the lowest on record, despite months of predictions that they would rise. That's great news for the housing market.

To whom do we owe thanks? Take a look in the mirror.

American investors, from individuals to institutions, are helping to push down interest rates by buying up bonds, starting with U.S. Treasury bonds. Mortgage interest rates tend to follow the yield on Treasury bonds very closely, and U.S. investors are now the second largest group of investors in Treasuries, pushing the price up and the yield on the bonds down.

The large stake that Americans own in our own national debt may help calm fears that a decision made by investors in some faraway country -- such as a change in Chinese monetary policy -- could hurt American borrowing power.

We've gotten used to thinking of China as the loan shark who gives us the cash our federal government needs to fund deficit spending. And it's true that Chinese investors hold $895 billion in Treasury bonds, according to a March 31 report from the Treasury Department.

China's central bank said last weekend that it would allow the Chinese currency, the renminbi, to trade more freely within a controlled range against foreign currencies, including the dollar. That means that China might no longer force down the value of its own currency by buying so many U.S. dollars, usually in the form of Treasury bonds. (Why would China want to weaken its own currency compared to the dollar? To make Chinese exports cheaper and more competitive in American stores.) The change could leave a huge hole in the market for Treasury bonds and potentially higher interest rates for borrowers.

But China isn't the only holder of U.S. debt. U.S. households own $796 billion in Treasury bonds, according to the Treasury.

Stop and think about that for a minute. U.S. citizens now own almost as much of the U.S. debt as China does. Japan is not far behind with $785 billion, followed by long list of investors from other countries. The diversity of investors gives interest rates some of their relative stability.

These investors put their money into U.S. bonds because, despite our own budget deficit, the U.S. looks more stable than many other countries. Since late April, the price that investors pay for 10-year U.S. Treasury bonds has spiked, driving the yield on the bonds from 3.9 percent in late April down to below 3.2 percent, where the yield has been for most of June.

Bonds backed by home loans have done the same, leading to lower interest rates. The average interest rate for a 30-year fixed-rate mortgage averaged 4.69 percent, with an origination fee of 0.7 percent, in the week ending June 24, according to the latest Freddie Mac Primary Mortgage Market Survey. That's the lowest ever recorded since Freddie Mac started keeping track in 1963.

Rates should stay low for at least the next week or so, according to more than half the experts polled by Bankrate.com.

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