News we all know already - The Fed dropped the Fed Funds rate by 3/4 of a point to 3.5% on Tuesday.  Banks quickly matched that and dropped the Prime Lending rate to 6.5%.

Now the question is why are bonds falling and conversely mortgage rates appearing to rise?

Initially, when the rate cut was announced a euphoria developed causing bond pricing to improve and mortgage rates to fall.  If you were able to catch this wave through advice from your mortgage broker - than good for you.  Since then though, bond prices have backed off from almost 3 years highs as have mortgage rates from 3 year lows.  (Remember the inverse relationship) 

This is not a rare occurrence.  It is almost becoming a tradition.  When the Fed cuts the Fed Funds rate back in September, mortgage rates went up almost a full point.  As we have seen this time, though mortgage rates got better initially, the have worsened in yesterday and today.  The FNMA 5.5% 30 year bond has already crossed the 10 day moving average and appears to be heading for the 25 day moving average which is another 50 bps away. 

Back to why?  When the Fed lowers the Fed Funds rate, then money becomes cheaper for businesses and wealthier individuals to borrow money to increase capitalization and investments.  Businesses doing this become more profitable, entities want to buy the stock of such companies and they take it out of the safe haven of bonds.  Since not as many people are wanting to buy bonds, the price falls and the yield goes up.  Remember the yield translates to the interest rate - hence, mortgage rates increase. 

Of course things are never this simple.  A balance has to come about, hence the fluctuation in & between the bond markets and the stock markets.

Now, the argument couldbe made that interest rates did fall again - which they did.  It only took 5 weeks for this to happen (from Sept 18 to Oct 24).  Rates eventually got better than that as well.  Will rates improve here as well - more than likely.  Perhaps take a little while during which more news will come out, interest rates will rise and fall - perhaps more quickly than the Roman Empire - but it will happen.

How far will rates rise then fall???