Treasury bill rates greatly affect the rates consumers pay on credit cards, mortgages and other lines of credit.

A vicious cycle is going on. The government engages in deficit spending, racking up a debt which makes any investor wonder if the U.S. is good for the money. Investors who loan money, require a risk premium to compensate for their risk exposure. As the risk to loan money to the U.S. increases from a ballooning debt, the required rates of return for the Treasury debt must increase. So, the U.S. government must pay higher yields to China and other creditors to finance deficit spending.

To help finance government spending, the Treasury has sold U.S. debt directly to the Federal Reserve. Since this trend of the Fed buying Treasuries took particular hold in March, 30-year fixed mortgage rates have not only gone up, but have become more volatile. Once a new wave of adjustable rate mortgages (ARM) come due, people will be stuck with higher mortgage rates, and hundreds of extra dollars of housing costs every month. Increasing mortgage costs, unemployment, and underemployment, will result in more foreclosures. More foreclosures will prevent real estate markets from recovering. The Federal Reserve will then be tempted to purchase additional mortgage-backed securities, or bailout more financial institutions, with money we don’t have. The debt will be monetized and the vicious cycle comes full circle. Those lucky enough to avoid foreclosure and generally keep their financial lives above water, will be forced to incur higher costs on all lines of credit.

Compare the hike in the 30-year fixed mortgage rate (national average) starting in April, with the Fed’s monetizing of debt hitting full swing around the same time. Again, note the increased volatility in mortgage rates as the Treasury sells debt to the Fed:

Source: Bankrate.com

Source: Federal Reserve Bank of Atlanta

As long as the government continues deficit spending, particularly selling IOUs to the Federal Reserve to finance it, count on mortgage rates to keep rising.