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Treasuries, Analysts Respond to U.S. Debt Downgrade

Markets and investors recoiled Saturday over news that ratings agency ""Standard & Poor's"":http://www.standardandpoors.com/home/en/us slapped U.S. Treasury debt with a downgrade, shifting credit ratings for the world's largest economy from the long-prized AAA rating to a weaker AA+ rating. In response, Treasury yields dipped over Monday, as housing analysts suggested that the hyped downgrade would hurt borrower confidence more than mortgage rates.


Rather than run from U.S. Treasuries, investors created a buying spree Monday, sending 10-year Treasury yields down to 2.43 percent from 2.56 percent Friday, according to ""CNNMoney"":http://money.cnn.com/2011/08/08/markets/bondcenter/treasuries_downgrade/. With respected mortgage companies ""Bankrate"":http://www.bankrate.com/ and ""Freddie Mac"":http://www.freddiemac.com/ ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô which suffered a downgrade Monday alongside fellow GSE ""Fannie Mae"":http://www.fanniemae.com/kb/index?page=home ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô yet to release mortgage rate updates, ""MonitorBankRates.com"":http://www.monitorbankrates.com/mortgages/mortgage-rates-decline-on-u-s-credit-rating-downgrade-30-year-mortgage-rates-at-4-28 signaled a plunge in mortgage rates over recession fears, citing falls in 30-year fixed-rate loans to 4.28 percent and 15-year mortgages to 3.50 percent, down from 4.48 percent and 3.69 percent, respectively, from last week.

Housing analysts and economists reacted to the news with a mix of alarm and unconcern.

A ""story"":http://online.wsj.com/article/SB10001424053111904140604576494572068990408.html in the ""_Wall Street Journal_"":http://online.wsj.com/home-page quoted Karen Shaw Petrou, managing partn:er at research firm ""Federal Financial Analysis"":http://www.fedfin.com/, as saying that a downgrade could ""do nothing but harm"" the U.S. mortgage market. She asks: ""The question is how much?""

""My thoughts are that [mortgage] rates may be impacted by 30 basis points at maximum,"" Lawrence Yun, SVP and chief economist with the ""National Association of Realtors"":http://www.realtor.org/, wrote in an ""article"":http://economistsoutlook.blogs.realtor.org/2011/08/08/u-s-credit-downgrade/. ""Mortgage rates will most likely move in the same direction as the government borrowing rate, because there is government backing of mortgages on nearly all mortgage originations in today's market.""


""Even if rates were to rise because of the downgrade, this fact is less important in light of the current overly-stringent underwriting standards and the general lack of consumer confidence about the economy,"" Yun added. ""A 30-year fixed rate rising from 4.3% to 4.6% will not change the housing game that much, but a return to normal underwriting standards and a boost to consumer confidence will be the true game changer.""

Celia Chen, senior research director and housing specialist with ""Moody's Analytics"":http://www.moodys.com/Pages/atc003.aspx ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô the ratings agency that preserved U.S. debt credit ratings along with fellow agency ""Fitch Ratings"":http://www.fitchratings.com/index_fitchratings.cfm ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô joins Yun in downplaying the role a downgrade will ultimately play in still-reeling mortgage markets.

She calls the ratings shock a ""psychological blow on the nation"" that will largely bypass the housing sector and economy at large, chalking up wherewithal in global equity and bond markets to investors who stayed on the alert about a S&P downgrade for U.S. debt ratings.

""Investors are still buying 10-year Treasury bonds [at] record-low rates, indicating that they are not worried about the U.S. defaulting,"" she says. ""Thus mortgage rates will not be much affected by the downgrade. They will remain low [and] thus a positive for the housing market.""

She predicts that an unaffected job growth outlook will ""fuel strong demand for [the] housing"" sector.

Chen adds: ""The downgrading does, however, heighten the risk that the nation ends up back in recession, as the selloff ends up feeding on itself. If the nation double-dips, housing's fledgling recovery will be squashed.""

Explaining its reasons for the debt downgrade, S&P issued a ""report"":http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8 that signaled low confidence in U.S. public policymakers and federal institutions.

""The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics,"" S&P said. ""More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.""

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.

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