The mortgage bond market got pummeled yesterday and we got multiple interest rate increases. From yesterday morning to this morning, interest rates went up by a full quarter percent (.25%), which is a significant day-over-day increase. From Thursday of last week, they have gone up by a full half a percent (.50%).
What caused this? Well, a few factors that have been in the making, but first I have to backtrack.
The first thing to know is that what has caused these extremely low rates throughout the year was the Fed’s guarantee that they would purchase $1.25 Trillion in Mortgage-Backed Securities (MBS). These securities – and the price they’re trading at – are what drive interest rates. With the guarantee that the Fed will buy packaged loans on the secondary market, banks know that they have a guaranteed buyer, which will free up liquidity for them to lend to other people. So the cycle continues … The Fed’s ultimate goal is to spur activity in the housing industry, which it has definitely done so, both in the purchase and refi markets.
Now, back to what has been happening this past week, and especially yesterday: it’s finally coming to a point where the Fed (after purchasing packaged loans) is also trying to sell them off, but is having trouble. We are relying on foreign investors, and foreign central banks, to buy our debts. So far they have done so, but some are starting to threaten that they will no longer buy. In addition, the 10-Year Treasury bond is a lot more attractive than the lower yields on MBS, and traders would much rather gain more money through the 10-Year Treasury, meaning that mortgage bonds will start to increase in price, meaning that interest rates go up.
I am definitely not an expert and there are so many other driving factors that we can’t even grasp our heads around, but this is just to give you an idea of one of the reasons rates are going up. I don’t see the steep uphill just yet, but the Fed-selling problem is definitely an issue that means we may have hit bottom a few weeks ago. Regardless, please remember that these interest rates are still amazing!
