You are currently viewing Fed Rates VS. Mortgage Rates

Fed Rates VS. Mortgage Rates

Mortgage rates are determined by the supply and demand of Mortgage Bonds in the bond market.  They are known as MBS (Mortgage Backed Securities).  Mortgages are not tied to the 10 year Treasury bond as everyone believes.  The 10 year typically runs parallel to mortgage bonds and is a good indicator on mortgage bonds will do.   I said “Typically” and the market we are in is anything but typical.   When mortgage bonds trade up, mortgage rates go down; and when mortgage bonds trade down, mortgage rates go up.   What we have is a supply and demand issue.

Quick example, Best Buy gets in the new 92” Mega Awesome everyone has to have new TV. They have a line at the door Saturday morning to buy the T.V. 200 customers deep. The price of the TV is $2000 and they only have 50 T.V.s. Before they open the door they raise the price to $3000 and half the people get out of line. Still leaves 50 more people than T.V.’s. They open the doors 25 people grab T.V.’s and get a great price, 25 people read the box and kick the tires, 25 people see the new price because they where not paying attention and did not know it went up and they just leave and the remaining 25 people believe that the price will come back down. Meanwhile Best Buy sees that they just made an extra $1000 per TV and raises the price to $4000. Ten more people buy, everyone else leaves and Best But has 15 TVs left but made more money on the 35 they sold than they would of if they sold all 50 at $2000.

Mortgage bond investors got spooked when they realized the HUGE amount of bond supply they were expected to absorb in such a short period of time. Add this to the rapid changes from the FED on the FED Fund rate and knowing this would increase the supply of Treasuries in the market. All of this has caused mortgage bond traders to run for the hills and drive the demand for Mortgage Backed Securities down, in return driving rates up by .75% in one day and they continue to rise.

Over the weekend the FED announced it would ramp up the purchasing of Mortgage Backed Securities and Treasuries again to the tune of $700 Billion dollars. This should have the effect of driving mortgage rates down again, but time will tell.

The Bottom Line

Bottom line, we are in uncharted waters. I understand how all of this is supposed to work and if it follows that path it should over the next several months (once markets calm down) we should be back at historically low mortgage rates. Today we are not, but that can change at any time.