A short lesson in Treasuries, Mortgage Bonds, and Home Loan Interest Rates -
Yesterday we saw an huge disconnect between the U.S. Treasury 10 year note and the Mortgage Backed Securities (MBS). The media continues to get it wrong...and even some mortgage professionals are watching the wrong instrument.
While most people were watching the stock market plunge over 400 points yesterday (and by the way...it was close to a 10% loss), the Treasury market was on fire. The 10 year note was up 294 basis points while FNMA 30 year MBS were up just 12 basis points. What does this mean? Well if watching the 10-year note and in the process of financing a home, one would think that home loan rates were improving by close to .75%...and that would be a sad mistake.
So what is the difference between Treasury Bonds and Mortgage Bonds? Treasury instruments are backed by the full faith and credit of the U.S. Mortgage Bonds are backed by mortgages. However recently in an effort to stimulate the economy and restore confidence to the markets, the Treasury stepped in and took over Fannie and Freddie guaranteeing their paper, much like they guarantee Treasuries. MBS offer a higher return than a Treasury and now offer the same safety...if it were me, I'd put my money in MBS rather than a Treasury. The markets haven't figured that out yet.
Today, those same Treasuries that took off like a rocket are now falling faster than they rose. This morning they are down 146 basis points in the short time the market has been open. Again, watching this instrument as a guide to home loan rates would be a mistake.
MBS have been having a tough battle with the 200 day Moving Average and this morning have broken thru to the downside and quickly recovered with a strong bounce. However, we have a Falling Resistance Trend line that likely will keep a lid on any noticable improvements. Today could be a rough ride for Bonds as the stock market attempts to recover. Remember...the investment dollar typically will flow from one market to the other (stocks & bonds).
So where are home loan rates headed? While we are seeing intra-day swings and day after day volatility, the trend is moving mostly sideways meaning rates have remained somewhat unchanged lately. We are headed for a break out - technical analysis shows us that bonds are in for a squeeze and will break out of this current sideways pattern. Inflation has moderated and with the slowing economy and continuing Job deterioration...these fundamentals should help Bonds improve, thus home loan rates improve. But we may have some ugly days before any improvement.
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