- - Thursday, August 4, 2011

As I write this column, we are three days away from the deadline to raise the debt ceiling, which would ensure our government meets its interest-payment obligations.

Despite the media hype and ongoing congressional bickering, I woke up this morning to see that the yield on the 10-year U.S. Treasury bond has dropped to 2.85 percent — the lowest in many months.

I am confused. Why would multinational investors continue to gobble up Treasury bonds just days before the very real possibility that such bonds could go into default?

There could be a couple of reasons. First, investors in U.S. federal debt believe our elected officials are not stupid enough to fail to reach an agreement, resulting in default of our federal debt.

Second, investors believe that even if a deal isn’t made in Congress, the U.S. will continue to meet its obligations and make its interest payments.

Third, despite the economic and political dysfunction in the U.S., economies and governments around the rest of the world are even more dysfunctional. To quote the wisdom of my neighbor, “If you think we’re dorked up, look at the rest of the world. It’s even more dorked up.”

Fourth, and perhaps most important, recent economic news continues to disappoint the markets. Last week’s numbers on gross domestic product (GDP) showed an annualized expansion rate of just 1.30 percent in the second quarter of this year. That was below the 1.60 percent expected by economists. Worse yet, the Commerce Department announced a revised GDP number of only 0.4 percent in the first quarter. The original number was 1.9 percent.

Other reports showed consumer spending rose just 0.1 percent in the first quarter, down from a 2.10 percent rise in the previous quarter.

Leading indicators of future economic activity were disappointing. The consumer sentiment gauge fell to 63 in July, down from 71 in June.

The market clearly is telling us it believes the U.S. will not default on its debt. It is telling us the global economy is in worse shape than the U.S. economy. And it is telling us the worldwide economy is not in any real danger of overheating and sparking inflation.

All of this is keeping rates exceptionally low, including mortgage rates. Homeowners, if you haven’t refinanced, look into it because you may be able to save some money.

As for potential home purchasers, you may be very close to hitting the perfect time to buy. Rates are at historic lows and the ultrasluggish housing market continues to depress home prices. “Buy low, sell high,” as they say.

Next week, after the federal debt ceiling deadline expires, I might be writing an entirely different column.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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