How The Bank Of Japan Impacts U.S. Mortgage Rates

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The European Central Bank and the Bank of Japan both indicated yesterday that their respective interest rates may rise. 

Both groups are equivalents to our Federal Reserve Bank.

As a story that would normally get buried on Page 22, I thought I'd bring it to the forefront just to hammer home a very important point about how interest rates work on a global level.

Debt (i.e. bonds) issued by strong governments is considered to be guaranteed money and risk-free. 

For example, when the United States issues treasury bills and notes, the money is considered to be default-proof and this is why the interest rates tend to be so low.

On the flip side, corporate debt like Ford Motor Company's is relatively high rate because as the company's financial struggles mount, the default risk on that debt is mounting, too.  More default risk = higher rates.

So, when the ECB and Bank of Japan talk about raising rates, foreign investors in those countries can now earn a higher rate of return without taking on more risk.  The risk is virtually nil.

When stable nations raises rates, global money often follows, flowing to areas of higher returns (i.e. Europe, Japan) from areas of lower returns (i.e. United States).  As market players sell U.S.-dollar denominated bonds, the supply increases, driving prices down.

When bond prices go down, it forces rates higher.

It's truly a global marketplace and this is one of the major reasons why it's impossible to predict where interest rates are headed.  Just when you think you understand the U.S. market, a foreign nation makes an announcement that shifts the entire balance.

For a story that will never get read in your local paper, changing interest rates abroad can have a dramatic impact on interest rates locally.