US Credit Rating Downgraded

How does the downgrading of the US credit rating affect VA interest rates?


Over the weekend, S&P, one of three main credit rating agencies, decided to downgrade the United States to an AA+ rating from an AAA for the first time in almost 80 yrs.  Many potential home buyers or people looking or thinking about refinancing may wonder what this means for them.  We will address specifically Veterans and VA rates today, but the post can be applied to anyone.

Over the weekend, many market analysts and gurus were trying to guess and predict what would happen to interest rates in response to the credit downgrade.  If you were to read a book on the economy or bet on the most likely outcome, you would have predicted, just like the pros, that interest rates would be higher today.  Here is how you look at why that would happen.  Suppose you were lending someone money who had perfect credit and no likelihood of not being able to pay you back, it was almost guaranteed you would get your money back plus the interest.  You would probably give them a very low and stable interest rate in return for them not being a risk to you or your money.  Now suppose that you had a very good reason to believe that the once perfect credit person you were lending money to, would perhaps not be able to pay you or would maybe miss some payments here or there?  Would you want to keep lending them money at the same interest rate or even the same large amounts?  Most likely no!

Well, this is how countries, investors, and institutions that were buying US treasuries were expected to react this morning.  One would think they would all start taking money back from the US and this would in turn put the US in a tough position and would ultimately increase interest rates.  However, interestingly enough money poured into US treasuries today and drove VA interest rates lower!

One thing that is worth noting however is that VA mortgage lenders did not pass on a lot of the gains interest rates had today, but instead are in essence sitting on the sidelines to see what happens tomorrow.  Normally with as big of a rate rally as we had today interest rates on VA loans would have gotten better than they have, but VA mortgage lenders are waiting to see what tomorrow brings.  The Federal Reserve has their FOMC meeting on interest rates tomorrow too!

Here is to lower VA interest going forward.

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