Mortgage rates briefly spiked to 4.56% following Moody’s downgrade of U.S. debt, but quickly stabilized’
One mortgage lender downplays any long-term impact, citing stable Treasury yields and continued strength in the broader economic outlook as mitigating factors.
Future mortgage rate movements are expected to remain range-bound, with short-term volatility tied to Federal Reserve signals and broader economic trends rather than the credit downgrade itself.
In the wake of Moody’s recent downgrade of U.S. sovereign debt, mortgage markets saw a flash of turbulence, with rates jumping sharply to more than 7% before quickly settling back — a pattern reminiscent of past credit rating cuts, according to industry experts.
The downgrade from Moody’s, which cited long-term fiscal concerns and political brinkmanship, triggered immediate reactions across financial markets. Mortgage rates, which track closely with yields on the 10-year U.S. Treasury note, surged briefly in response.
Shmuel Shayowitz, president of mortgage lender Approved Funding, described the initial market response as “unexpected short-term volatility.”
“The Moody's downgrade did create some very unexpected short-term volatility, as we saw with the initial reaction in the stock and bond markets,” Shayowitz told ConsumerAffairs. “Mortgage rates, which directly correlate with the 10-year Treasury, did spike in the immediate aftermath to as high as 4.56%.”
Temporary, so far
However, the spike proved fleeting. Bond yields and mortgage rates quickly retraced their steps, suggesting that investors and analysts may be taking a more measured view of the downgrade’s implications.
“We’ve already seen a rapid rebound, with yields returning to levels we saw late last week before the announcement,” Shayowitz added. “The key level to watch here is 4.5% on the 10-year – so long as we're under that, we will maintain some stability in mortgage pricing.”
Shayowitz compared the current situation to past U.S. credit downgrades by S&P and Fitch. In those cases, markets also reacted sharply to the news before ultimately regaining equilibrium.
“There was headline shock, then the market normalized,” he said.
No lasting effect?
Despite the headline risk associated with a downgrade from a major credit rating agency, Shayowitz emphasized that such moves rarely have lasting effects on mortgage pricing.
Instead, the broader economic environment remains the primary determinant of mortgage trends. Potential stabilizing forces include serious deficit reduction, government spending cuts and incentives to spur domestic investment and employment.
Looking ahead, Shayowitz expects mortgage rates to remain relatively steady, albeit with minor fluctuations driven by Federal Reserve policy and broader economic data.