"Basically the bond market is giving the middle finger to the government over their projected increase in deficits and bail out plans which would both require issuing significant amounts of new debt." I hope nobody expected anything different. Good thing for pension funds that real estate is slipping - we know that will return faster than long term bonds but now they are scared silly to invest in real estate. It's a fun ride we're on in this carnival of economic uncertainty. I've heard of the butterfly effect but isn't this more like the elephant in the room effect? (Wholesale rates had already started up by 10:00AM in case you didn't see it.)

I wish people truly understood how the rates are determined. They hear that the fed cut rates a 1/2% and they think wow it was 5.5% now it's only 5%. I think a very slim number of people understand how it truly works.

Yep - they are going to be on a swing set for the next few weeks.  I like to think that when we really hit a hard bottom of resisitance (like we did today) we will bounce back up nicely - but unless the Fed cuts to the 2 year note rate (like 2%) that's not likely... and we thought LAST year was rough!

Matt: I know that just because they cut stuff doesn't necessarily mean that it goes like that for lenders... How are rates deteremined?....when I look at daily mtg rates here it is all over the place with all different scenarios. And with this in mind.. just how much does it affect the real estate industry when these types of auctions produce little or no effect in attempts to bail out the Savings and Loan co's?   

P.S. I'm trying to learn :)

No one simply "sets" rates they are determined by the market through supply and demand.  The market or buy and sell bonds or other debt instruments, the more someone is willing to pay for a bond the lower the yield (rate).  If there is less demand for bonds, supply and demand says people will pay less, thus a higher yield or rate.  

What happened with this auction is just that, the US treasury attempted to auction debt to fund the US government.  Because few buyers turned up, the bonds sold for a low price, thus high yields.  While not strictly based on long term treasury rate, mortgage rates correlate very well to their yields.

Very few buyers came to the auction BECAUSE of the belief the government may try to bail things out.  A bail out would require the government issuing more debt, lots more.  This would increase the supply of bonds, lowering their price and thus increasing the yield (rate)  That's why bailout attempts will likely to cause mortgage rates to actually go up.

Well, I appreciate your in depth explanation Matt. That really helped me to understand more on why things are like they are and are going to be. It's nice to have some info...though I would still say "it's in my opinion....although you will get better information from the LO" :)

Matt, I believe there is a much simpler reason that there won't be an S&L type bailout: The S&Ls were federally insured (FSLIC) so they had to do something then, but the current batch of insolvent lenders are not federally insured. The government could and should just turn its back. If they want to "justify" this by saying they can't raise the money in the debt markets that will only be posturing.

Bill Roberts

Couple this with the fact the Senate just passed HR 5140 (the stimulus package) a few minutes ago, 95-6including raises to the GSE and FHA limits. It will most likely get signed in, and when it does, God help us a year from now.

That final tally was 81-16...my bad.

I would love to see the government actually noticing that taking a sharper turn down the path we are already on is not the way to change the path...  Economic policy overhaul...

Bloomberg news story: 30-Year Treasuries Fall Most Since '04 as Demand Fades at Sale 

Matt,
we took a hit in mortgage rates today.  It was kind of funny watching all the text mesages from pricing.  We even had one that said rates were worsening but they could not yet tell by how much.  We ended up with a 0.850 increase for the day.  I guess the foreign investors that we count so much on did not show for todays party.  aj

Thank you so much for such an informative post.

Thanks for explaining all of this in layman's terms.  Sure makes it a lot easier to understand.

Matt,  I wish that more people understood the concept.  Actually, because of one of your recent posts I decided to do an explanatory article for my next newsletter and will probably post it here as well.  Thanks for the info and explanation.  It should teach quite a few people more about the market and rates.

Matt,

The more I learn, the more scared I become.  Being a stork wasn't so bad.  I kinda miss my head being buried in that cold sand. 

How do we stop the bloodletting?

Government seems to be a lost at this point.  Being an election year they will continue to make a lot of noise.