Interest rates have declined as the Federal Reserve continues to lower the inter-bank offered rate to stimulate the US economy and counteract any effects from the lingering Trade War with China. The US treasury curve has a direct impact on consumer loans such as mortgages, credit card interest, auto loans and cost of capital for firms.
Mortgage loans have fallen to historic lows and will continue to do so because the 10 year treasury yield is approaching an all time low near 1.60% and this is a stark contrast to just 8 months ago when yields were above 3% and investors anticipated 2 to 3 rate hikes in 2019. A falling 10 year treasury is good for home buyers because mortgage underwriters use the 10 year a benchmark and add a slight premium to make the consumer mortgage profitable for the bank.
This drop in yields is great for first time home buyers and current home owners because it is possible to lock up a 30 year mortgage at 3.65% in today’s market. 3.65% is nearly 100 bps lower than this time last year when home buyers were rushing to lock in mortgages at 4.6% on the 30 year in anticipation of additional Federal Reserve rate hikes.
It is important to understand how this saves a buyer over the life of a loan. On a $300,000 mortgage with a 4.6% interest rate you will payback over $553,000 over the life of the loan. Or you will pay the bank $253,000 in interest on top of your $300,000 principal. On the same loan with a 3.6% interest rate you will only pay back $491,016 over the life of the loan and $191,016 in interest. With the lower interest rate you save nearly $62,000 in interest over 30 years. It would be better for the extra $62,000 to be in your pocket or retirement account than pad the bottom line of a bank.
Car loans also have ticked down and consumers that picked up 48 month loans new car loans have averaged around 5.2% annually. There are some automakers such as Ford, Chevrolet, Hyundai, Kia and Toyota have been offering 0% loans for consumers with perfect credit ratings.
You might ask how it is possible to offer 0% interest on certain loans for new cars. These specific automakers have financing divisions attached to their primary business of manufacturing automobiles and this allows them to combine auto loans and securitize them. This securitization allows investors to purchase a bond, which consists of a variety of autoloans with low interest rates and high interest rates. The rate of return for the bond is dependent on the default probability of the specific tranche of debt. It is similar to mortgage backed securities; however, not as risky. Now is a great time to buy a near car from an interest payment perspective.
Don’t forget Credit Card APRs have been inching up over the past couple years, as banks and lending institutions seek to squeeze every possible penny out of consumers. Credit card interest rates are painful for consumers and they will become less painful as the US enters a lower interest rate environment. APRs on Credit Cards don’t adjust or correlate as well as longer term interest rate investments because a revolving line of credit is suppose to be paid off within 6 to 12 months. However, there will be a few ticks down in APRs on Credit Cards as long as interest rates remain lower for longer.