Well, the Holidays are officially upon us. There are so many people who have already left for the holidays. We're seeing what happens during this time each year. Rates generally go up. That is exactly what has happened during this season.
Last week the Fed announced that it was going to buy up most of the mortgage backed securities. When mortgage backed securities or MBS's are bought up, rates drop down. Most people think that when the stock market goes down rates go down or even inversely when the stock market goes up.....rates go down. The reality is that there often times is a parallel relationship. But mortgage markets aren't determined by bond prices or bond yields. Nor are rates determined by how good or how bad the stock market does.....
THE BOTTOM LINE is that rates are determined by the movement of mortgage backed securities or, again, MBS's. The more that MBS's are bought, and the more scarce that they are in the financial markets, the more that you will see rates drop. The more that MBS's are available, the higher the rates. IT'S THAT SIMPLE TO UNDERSTAND.
So....why rates increasing over the Christmas season? This too, is fairly simple to understand. Basically, many wall street execs are off for the holidays. With the recent volatility in the market, they traders don't want to have exposure through a position in the market. In other words, if they buy a lot of MBSs and the rest of the world is selling....well....if they're on vacation, they're stuck with product and are having a very miserable Christmas. However, if they sell their position or a portion of their position prior to going "on Holiday, they can relax while on Holiday. It's easier to buy back a position after Holiday than trying to sell their position.
Therefore, rates are expected to go up during Christmas and New Years....This is a general rule. Markets will still drive the deman for MBS's up and down. Markets will be active and still directionally determine the direction of MBS's. But all things being equal, the rates would still increase a bit as traders hedge their position in the market.
That means, that, all things being equal....that rates should come back down AFTER THE FIRST OF THE YEAR, as investors get back into the markets. Capiche? That's the ticket friends.
We'll see what markets do to the rates keeping in mind that traders are liquidating their position and exposure now.
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