Mortgage Rate Volatility Explained Over the last few days, we have seen unprecedented volatility in mortgage rates. In general, mortgage rates follow the long-term (10-year) US government bond rates, but they also vary based on investor demand for mortgage-backed securities. So when long-term bond rates move, the mortgage rates can move either more or less than the government interest rates, depending on demand for mortgage-backed bonds. Because the Federal Bank has been buying both US bonds and mortgage-backed bonds, the rates on those have been artificially low for quite a while. In a recent speech Federal Reserve Chairman Ben Bernanke said that they would eventually stop buying these bonds. That would mean that at some point in the near future a huge buyer (US Government) would leave the market and rates would have to rise to attract other buyers for those bonds. The result was that no one wanted to be the last person to get only today’s low rates on their bond investment so most everyone stopped buying mortgage-backed bonds almost immediately. Worse yet, some bond owners were forced to sell because of margin calls and for other technical reasons. To attract someone to buy those bonds, interest rates had to move up now, instead of waiting until the Fed actually stopped buying. We don’t know how long this volatility will last but usually it doesn’t take too long for a market to find its equilibrium. Odds are that rates will go up and down and settle somewhere higher than they were a couple of weeks ago. The best advice: no one knows where rates will end up (if they did they would indeed be wealthy). So, if today’s rate is acceptable, it’s best to lock it now since tomorrow’s rate is equally likely to be higher or lower.
Posted on: Tue, 25 Jun 2013 20:44:26 +0000
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