Rising oil prices, weak housing data, and ongoing credit concerns pushed mortgage rates lower last week as investors sought safety for their dollars. Stock markets took losses and bond markets — including mortgage bonds — booked gains. Remember, when mortgage bonds go up in price, mortgage rates come down.
To understand why mortgage rates tend to drop when stock markets have a sell-off, we should look at the situation from an investor’s perspective.
When lots of investors are selling stock positions, stock markets fall. The investors get cash in return for their sold securities. But cash doesn’t offer much of a return on investment. So, investors look for “better” places to invest their cash.
The bond market usually fits the bill.
As more dollars enter the bond market, the relative demand for each type of bonds increases. With the higher demand, bond prices move higher, thereby pushing yields down. And mortgage bonds are just one type of bond that benefits like this — there are municipal bonds, corporate bonds, and treasury bonds/notes, too.
This week, the biggest news will be Wednesday’s release of the Existing Home Sales report, and Thursday’s New Home Sales. Both are expected to show relative weakness from August’s figures but because the weakness is expected, the news shouldn’t move mortgage rates.
The biggest threat to mortgage markets this week will be changing expectations about the Federal Open Market Committee’s meeting next Tuesday and Wednesday. If markets believe that the Fed will try to spur economic growth, expect money to flow back into stocks (at the expense of bonds) which will pull mortgage rates higher.