Bonds

I have written for years educating consumers on why interest rates move up or down. I know all of you just want to know if you’ll be able to refinance, and when to pull the trigger and lock in that rate. This week I’m going to break it down into the two most important and simple factors that will impact you, and your ability to get a historically low interest rate.

Super Simple Factor #1 – Supply & Demand:
For every mortgage that is funded by a lender, that money must come from somewhere. For a majority of mortgages in the US, that money comes from the sale of mortgage bonds. When there’s a glut of bonds to be sold (like the record number of new mortgages originated because of falling rates) there has to be investors willing to buy them. If there’s not enough demand, the bond holder’s only option (because they can’t keep them) is to offer higher and higher rates to attract buyers.

Read this week’s economic news below because not only is there a surplus of mortgage bonds wishing to be sold, but now with the government’s plan to spend 1 or 2 trillion to support the economy, there will be a huge supply of government bonds flooding the market as well.

Super Simple Factor #2 – Lender Capacity:
There are $11,000,000,000,000 (that’s eleven trillion) of mortgages in the US. About half of all mortgages could benefit from a refinance. That’s 5.5 trillion. In a normal year, mortgage lenders originate about 3 trillion in new mortgages, which are roughly split 50-50 between purchases and refinances. If you do the math, that’s about 1.5 trillion in refinance volume in an average year. You can now imagine the problem when 5 trillion in mortgages wish to refinance – not in a single year, but all at the same time. Lenders don’t have the capacity to handle all those requests. The only way lenders can slow down the flow of new applications is to artificially raise rates.

Huge swings in mortgage rates this week due to volatility…

This week has been an extraordinary week in just how much fluctuation there was within the bond market on any given day. In my near quarter-century studying the bond market, the wild swings this week eclipsed anything we’ve ever seen – and that includes the financial crisis of 2008.

Everyday mortgage backed securities (MBS) are offered to investors for purchase, just like stocks. The “normal” volatility of MBS on any given trading day is maybe 20 “basis points”. It’s not important to go into what basis points are, but the number 20 is. One other important footnote – the price of a bond has a reverse effect on the interest rate. If bond prices go up, rates go down – and the opposite is also true.

The chart below is the daily trading price of MBS for the past 3 months. Green days are good days for rates, and red are bad. As you can see starting in December, the price of bonds was having a nice rally, meaning lower interest rates, as the price continued to rise. What I want to call your attention to is the length of each day’s data point. The arrows point to the top and bottom range of prices of MBS for that day. The taller (or longer) each point is, represents a greater spread from the high and low price offered that day. From December up until the second week of march there really wasn’t that much movement on any given day.

Take note of the very long data points at the right end of the graph. That’s this week in the bond market. When an average trading day is “20” we had days this week of “200”.

What does this all mean for you? Every lender’s capacity is different. Every lender is responding to the wild swings in mortgage prices differently. The only chance you have to get the best rate possible is to work with a broker with access to multiple lenders and that also understands what’s happening in the market today. This is not a market for amateurs.