Yesterday, excitement was in the air as traders came back into the market with money in both fists. To balance their risk tolerance, money was flowing freely into both the safe haven of Bonds as well as the Stock market.
As mortgage rates improve, this opens the door to more refinancing. As refinances take place, mortgages are paid off leaving portfolios of Mortgage Back Securities with more cash and less securities. This means they have less risk...and lower performance.
Mortgage Portfolio Managers are holding too much cash, so these big mortgage portfolio's park this money in Treasuries - thus driving the yield on the 10-year Note lower. This is called convexity buying.
As I've said before, the media continues to be off base when they say that "mortgage rates are tied to 10-year Treasures." More likely, the 10-year Treasury is influenced by mortgage bonds.
Mortgage rates improved yesterday by .25% - in just one day's trading. This morning bonds continue to improve and stocks lose steam as traders cash in due to economic worries. However, our charts show us that we are positioned for a sell off in the Bond market as well. While daily and weekly activity continues to be volatile, I still anticipate rates to remain fairly stable over the longer term as long as inflation remains in check.
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