Fannie Mae and Freddie Mac have been struggling with the fallout of the mortgage and foreclosure crisis for some time now. This week alone, there have been several front-page articles in the Wall Street Journal. In pre-market trading this morning, stocks of the two companies are in free-fall, suggesting possible losses as high as 50% today.
Recent troubles haven't helped the mortgage bonds of these companies either, which have lost significant value. Remember that bond prices, or value, move inversely to yield, or interest rate, and you will see that in a vacuum, mortgage rates should be rising.
Look at recent rate offerings of local lenders, and you will see that the opposite is actually what is happening.
This is because recent world economic challenges, especially volatility in commodities prices, are causing investors to seek safer investments. While it has been a difficult year for the dollar, in trying times, investors will seek out US Treasury investments. In conjunction with recent comments from Federal Reserve leadership downplaying the Fed's concerns about inflation, 10-year treasury rates have fallen by nearly 1/2% since their recent peak at 4.261% on June 13th to a close at 3.811% yesterday.
When the value of mortgages is compromised, and the broader interest-rate market is declining, the spread between mortgage and treasury rates will increase, and that is what we have seen in the past month.
This week, the spread stood at 2.56%, almost to the peak of 2.60% reached on March 13th of this year. With Wall Street firmly in the grip of a bear market, treasury bonds are likely to remain highly demanded, which suggests an extended period of lower treasury rates. Mortgage bonds are unlikely to recover strongly so long as concerns about the future existance of Fannie and Freddie, but that news could come at any time.
Recent market activity suggests that we may be entering an extended period of relative interest-rate stability. Treasury rates, which have moved as much as 13 basis points (a basis point is 1/100 of 1%) in a single day in the past month, have continued to have significant intraday volatility, but as this week has played out, each day has seen less movement. In the absence of news that materially harms the value of mortgage securities (unlikely, considering their already compromised image), it appears to be relatively safe to float rates at this time, waiting to lock for a shorter lock period. Remember that the shorter a time you must request the bank guarantee your rate, the lower that rate will typically be.
Expect the next rate-moving event to be a comment from some member of the Fed regarding inflation. Until that happens, there is a good chance of stability.
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