But that s unlikely to affect mortgages. Long-term rates are governed by supply and demand as investors trade bonds. Before the terrorist attacks, the government had been using budget surpluses to buy back many of its bonds, reducing debt. This happens because a bond s interest payments are a fixed dollar amount. If the bond s price goes up, the payment represents a lower percentage, or yield.
Analysts say many investors now expect the process to reverse.
The government, faced with the attack-related costs and shrinking tax receipts due to the slower economy, is likely to ease up its bond buybacks, or even sell new bonds. If so, bond supply will be higher than expected earlier. Bond prices would then fall and yields would rise. Mortgage rates could go up as well. It is possible the opposite could happen.