As we head into the last day of trading in 2006, there are a lot of market players that have already left for the long weekend. That's good for them, but rough for everyone else left behind.
With so many traders on vacation this week, there are fewer buyers and fewer sellers at any given price point for mortgage bonds. Therefore, it is much less likely that a person who wants to buy at a certain price will find somebody who wants to sell at a certain price
This is the concept of liquidity at its best.
With an already-fragile market psyche, the market’s complete lack of liquidity is causing what - on the surface - looks like an over-reaction to economic news, but is really just market forces at work. There just aren’t as many sellers willing to sell at the given prices that buyers want to pay.
Low liquidity causes prices for mortgage bonds move wildly and is the reason why rates have moved so much this week.
Markets are closing today at 1:00 P.M. EST which means that even fewer traders will show up at the office. Expect continued volatility.
