On money

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

© St. Petersburg Times,
published November 25, 2001

Mortgage rates invariably tied to government securities

Q. What caused the sudden increase in mortgage rates this month? Rates in my area rose a half percentage point in just two days. I noticed the 10-year Treasury note rose from 4.50 to 4.85. I had never seen that large of an increase in one week. The 10-year note had dropped to 4.25 or so just the week before. Please advise as we are hoping to close a loan very soon and hope we did not miss out on the low rates.

A. Mortgage rates went up in response to rising rates on longer-maturity government securities. If those rates come back down, mortgage rates will follow. Unfortunately for you, interest rates are no easier to predict than stock prices.

"The bond market is characterized by overreactions," said Greg McBride, a financial analyst for Bankrate.com, which tracks interest rates. "This was the second type of overreaction we've seen just in the past month."

First came the announcement that the government planned to stop issuing 30-year bonds. That produced a surge in demand for other government bonds with long maturities. Rising demand pushed prices up and interest rates down. Then news out of Washington and Afghanistan made investors feel optimistic that the war will be over soon and the economy will be on the road to recovery. If that scenario is correct, stocks offer the prospect of better returns than bonds, so bond prices slumped and interest rates rose. But hopes for recovery are just that -- hopes.

"There hasn't been any fundamental or substantive change in the economy as yet," McBride said. "There are still potholes in the economic road. The Federal Reserve is going to have to cut rates again."

His opinion is that mortgage rates are likely to go higher, then retreat.

"If you're at all sensitive to the prospect of rising rates and what that does to your monthly payment, you shouldn't be gambling by waiting and hoping rates will go lower," he said. "If you can roll the dice a little bit, you may benefit by sitting tight a little longer and seeing what develops."

Q. I have allowed my checking account, which pays very little interest, to accumulate to a substantial amount. I am considering drawing out some of the money and investing it but am at a loss as to what area I should go to. Should I venture into money market accounts, IRAs or stock and bond investments such as government bonds? I would be concerned that whatever I chose would be federally insured and with tax breaks, if possible, to protect my main beneficiary.

A. You are smart to think about moving some of your money out of your low-interest checking account, but be careful about putting money in investments you don't understand.

If federal insurance is important to you, your options are limited. Only banks and savings and loans offer federal deposit insurance. To boost your yield, put some of your money into a certificate of deposit, bank money market account or a high-yield checking account. Some banks offer "tiered" checking accounts, paying higher interest on deposits of more than $10,000.

You can invest directly in government securities and have confidence you will get your money back if you hold the investments to maturity. However, it is possible to lose money if you sell before maturity or if you own a government bond fund. Money market mutual funds are not insured, but have a very good safety record. U.S. savings bonds are another option, with the added benefit of tax deferral until the bond is redeemed.

Stocks come with no guarantees but offer potential for higher returns. Stocks also offer a tax break because you can qualify for capital gains tax rates on your profits.

Individual retirement accounts offer shelter from taxes until you withdraw the money, but without any earned income, you are not eligible to contribute to one.

Online money map

If you've developed an interest in preferred stocks, you probably know that information about them can be difficult to find. So far the best online source I have seen is QuantumOnline.com (www.quantumonline.com). Click on "stock lists" and check out the "securities for income investors."

-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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