Friday November 12, 2010 6:17 PM ET
By John Sauro
Mortgage Rates Rise as Bonds Sink
It was a bad day and a bad couple of weeks for Mortgage Rates as Mortgage Bonds and Treasuries have been under heavy selling pressure. After several days of losses, prices are now hovering just above a floor of support at 99.00. If this support level is breached pricing could easily drop another 50 bp lower to the next level of support. The problem now is that traders are reluctant to step in and buy. Hence, the saying “don’t try to catch a falling knife” China’s inflation fears and the Feds buying of Treasuries, part of the Quantitative Easing program was mainly the reason Bonds sold off. The Fed purchase of $7.23B of Treasuries today did little to help Bond prices as dealers had $29B for sale. Our benchmark 3.50% coupon Bond fell 78 basis points to end the week at $99.22.
Lenders immediately reacted and raised interest rates mid day, while some lenders re-priced higher twice today.
Congratulations to those of you who took my advice and locked into rates when I emailed Wednesday’s “Alert to Lock”
What’s Lies Ahead for Mortgage Rates?
A look at the Bond Chart below tells the story. The technicals aren’t pretty. Bonds hate inflation. Why? Because as inflation rises, Bond prices have to fall in order to give Bond investors a more attractive yield that will outpace inflation. A rising tide raises all ships. Think of inflation as the tide and interest rates as the ship. Therefore, China’s recent reading on inflation, which came in at 4.4% annual rate, is going to be key in how Bond prices and Mortgage rates behave in the coming weeks and months. In order for China to fight inflation, they have to raise rates. And if China raises rate, global investors will move their money into China, unless the U.S. raises rates to keep those same investors. Get it?
So, while our government would like to keep rates low to help our economy, they may have no alternative but to raise rates or loose investors or the ever growing U.S. Debt.
I maintain a bias toward locking into rates at this time.
Watch your email for future Rate lock Alerts.
Bond Price Chart
Mortgage Rates Move Inversely of Bond Prices
