Why Are Mortgage Rates Low?

That is a question that has the top economists in the country, and even the world, stumped. Long term interest rates, which include mortgage rates, are staying low. This is in spite of the Federal Reserve in our country and other Central Banks around the world raising short term interest rates. Normally, the longer the money is borrowed (the term) the higher the interest rate that is charged. This is called the yield curve. A typical yield curve may range from a prime rate of 6% for short term money, to 8% for a longer term- say a 10 year term. Currently prime rate is at 6% (and expected to go at least a half point higher) while the 10 year US treasury is yielding only 4.10%. This is called an inverted yield curve and is what is confounding the economists, including our own Mr. Greenspan.
What is my theory? (All economists have at least 2 theories.) It is the $55 barrel of oil as well as the soaring US trade deficit. The countries that we are paying $55/barrel of oil, as well as the countries that are running a trade surplus with us (China and Japan for example), are awash in US dollars. They have more money for their economy then they are currently spending. In other words, they are running a budget surplus as compared to our budget deficit. What do they do with the extra cash? Well, the interest rates in those countries are extremely low when compared to the debtor nations, such as the US, so they re-invest that surplus cash back into the countries (again the US) that contributed it. Since those investing, or creditor, nations have so much available cash to buy our debt, it goes back to supply and demand. That amount of demand for the bonds, and the relative low supply of long-term bonds, keeps the bond prices up which means the interest rates stay low. And, that keeps mortgage rates low. When will rates go up? If I knew, I would be on that fabled Bahamian boat!

Current Rates for Conforming Mortgages (under $359,650), as of 06/27/05 (a.m.) are:
(Rates quoted are at 0 points, other rates and fees are available)

30 year fixed: 5.5% (APR 5.58%) payments are $2,042.05/mo.
15 year fixed: 5.125% (APR 5.261%) payments are $2,867.56/mo.