For years now, the media and inexperienced loan officers everywhere have suggested that the 10-year Treasury Note, a government-backed security, is directly tied to mortgage interest rates, that the two are separated by a specific interval – which is simply not true. The graph on this page, which shows interest rates for 30-year fixed-rate mortgages and the yield for the 10-year Treasury Note for 13 months, clearly demonstrates this fact.

At a quick glance, yes, it’s easy to see why the mistake is made. As you can see, for 11 out of the 13 months recorded in the graph, the yield of the 10-year Treasury Note and interest rates for 30-year fixed-rate mortgages did follow a somewhat similar long-term path, despite obvious short-term divergences.However, take a closer look at the drastic change that occurs from January through March 2008. What’s interesting about this graph is that, during this period, the Federal Reserve had cut interest rates six times, from September 2007, to March 2008, and yet mortgage rates were actually higher in March 2008 than they were a year before. Not only does this demonstrate that the yield of the 10-year Treasury Note is not pegged to mortgage interest rates, it also reveals that mortgage interest rates are not set by the Fed either.

Stop being misled. If you or someone you know is thinking about buying or refinancing a home, give us a call. We’ll give you the facts you need to make a truly informed decision.

Historic, low home loan rates have been about the only thing stable in the economy these days. This low level mark breeds complacency, especially with the buzz in the air that rates may go even lower. But the question hangs in the air like humidity on a southern summer day – will rates go lower? And if there is a chance, should you wait and see or move forward now?

More Quantitative Easing
The buzz that began earlier this fall stemmed from talk coming out of the Federal Reserve that they were considering another round of Quantitative Easing in an effort to stimulate the sluggish economy.

What is Quantitative Easing? Here is what Wikipedia says:

The term quantitative easing (QE) describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.

“Quantitative” refers to the fact that a specific quantity of money is being created; “easing” refers to reducing the pressure on banks.

During the first round of quantitative easing, implemented during the credit crisis, the Federal Reserve bought Mortgage Backed Securities (MBS) which helped drive home loan rates lower. Lower rates resulted from these purchases because of supply and demand. When there is more demand, prices move higher and yields (interest rates), which move inversely to prices, move lower.

The Federal Reserve announced their new bond-buying program at their monetary-policy meeting on November 3 and they will be purchasing $600 billion in Treasuries through June 2011. This second round has been dubbed by the media as QE2.

Here’s the Difference
With the new program, the Federal Reserve will only be purchasing Treasuries. Both Treasuries and MBS are bonds and compete for the same investment dollar. There is a natural spread between Treasuries and MBS. If the yield of Treasuries goes down because the Federal Reserve is buying $4 billion to $5 billion in Treasuries per day, it would likely help MBS move down in yield (interest rates) and up in price as well to remain competitive. This natural spread is the reason many anticipate mortgage rates improving.

Another camp speculates that MBS may get disappointed by QE2, like a jealous suitor, and sell off. A sell off would mean price deterioration, resulting in higher yields (interest rates). An old-time trader’s saying goes something like this, “Buy on the rumor and sell on the news.” Since all this QE2 talk began, the bond market has (for the most part) had a small party. Could this be the “buy on the rumor” behavior? If so, then that would take us down the path of thinking that “sell on the news” will follow.

But How Low Can They Go?
Assuming the market responds favorably and MBS improve, it is probably unlikely that rates will move significantly lower than they are today. For lenders to be able to offer a mortgage rate around 3.625% to 3.75%, it would require significant trading by Wall Street investors in the 3.0% coupon. This coupon has seen very little activity.

In addition, lenders have been slammed with refinance volume and are running at, or over, capacity. Also, processes have slowed due to new government guidelines and lenders increased attention to compliance. With processes moving slower, lenders are requiring longer lock periods which impact interest rate pricing. They may look to further manage capacity by regulating their volume through the interest rate offered.

“Wait and See” is full of risk. If MBS improve, and if lenders pass on the price improvements to the borrower, it is highly likely the benefit in interest rate will be incremental. That’s a lot of “if’s” to hold onto for a hope of small gains.

The downside risk is far greater than the upside potential for rates to improve. If QE2 is not well received, the bond market would sell off and mortgage rates would suffer. History shows us this can happen much more quickly than any improvement.

With these incredibly low interest rates, there may not have ever been, nor ever be again, a better time in our history to purchase or refinance your home.

This morning brought us the release of three relevant economic reports. The results were mixed amongst them, but the more important ones showed stronger than expected results. The first was the least important and gave us favorable news. This was May’s Housing starts that revealed a 10% decline in starts of new homes last month. That was a much larger drop than expected and the pushed starts to their lowest level in five months, indicating that the housing sector may be weakening once the tax credits exp ire. This is basically godo news for the bond market because a weak housing sector makes a broader economic recovery more difficult.

The second was May’s Producer Price Index (PPI) that measures inflationary pressures at the producer level of the economy. Today’s release showed a 0.3% decline in the overall index and a 0.2% increase in the more important core reading. These readings hint that inflationary pressures were a little stronger than many had thought, which is negative for bonds and mortgage rates. This is because inflation at the producer level of the economy will likely carry into the consumer level, making long-term securities such as mortgage-related bonds less attractive to investors. The result is binds prices falling and mortgage rates rising.

The third report was May’s Industrial Production. It showed a 1.2% rise in output at U.S. factories, mines and utilities when forecasts were calling for a 0.8% increase. This means that manufa cturing activity was stronger than thought and is another negative for bonds.

There are two reports scheduled for release tomorrow, but one of them is the week’s most important and arguably the single most important report we see each month. That is May’s Consumer Price Index (CPI). It is very similar to today’s PPI, but measures inflationary pressures at the more important consumer level of the economy. It is expected to show a 0.1% drop in the overall reading and a 0.1% increase in the core data. A larger than expected increase in the core reading would most likely lead to a noticeable upward change to mortgage rates tomorrow.

May’s Leading Economic Indicators (LEI) will be posted late tomorrow morning. The Conference Board, who is a New York-based business research group, will post this data. It attempts to predict economic activity over the next three to six months. Good news for mortgage rates would a decline in this index, but the CPI is much mor e important to the markets than this index. Therefore, if the CPI reveals any surprises, this data will likely have little impact on Thursday’s mortgage rates. It is expected to show a 0.5% increase.

The Institute for Supply Management (ISM) said late this morning that their manufacturing index rose last month to a reading of 59.7. This was slightly higher than revised forecasts, meaning manufacturer sentiment was a little stronger than thought. That is negative news for bonds, but it was not enough of a variance to heavily influence trading or mortgage rates this morning.

There is no relevant data scheduled for release tomorrow, so look for the stock markets to help drive bond trading and mortgage rates. I f the major stock indexes remain calm, mortgage rates should follow suit.

Overall, will likely to be the most important day of the week for mortgage rates with May’s Employment report being posted. The rest of the week’s data could also lead to noticeable changes in mortgage rates and we also need to watch for stock market volatility. I suspect this will be a fairly active week for rates, but most of the changes will probably come the latter part of the week.

The weekly average for the benchmark 30-year Conforming mortgage landed at 4.93%, low enough to entice many homeowners to again consider refinancing. I locked a client in on a 3.125% 5/1 ARM this week, which hasn’t been available for over nine months.

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As we’ve noted in recent weeks, slow growth coupled with little inflation and a global flight-to-safety all accrue benefit to American mortgage seekers. As such, those contemplating refinances should take advantage. It is somewhat of a shame that the dip in rates didn’t actually occur during the last weeks of the homebuyer tax credits, since it might have goosed activity even further.

This Week; Treasury borrowing but the economic data will provide economists a lot of ammo to think about. Monday has Mar personal income and spending and the April ISM manufacturing report. There key data points each day this week, but the big one markets will be setting up for comes on Friday with the March employment report. The early estimates are for non-farm payrolls to have increased about 200K with the unemployment rate unchanged at 9.7%. With the Greek loan worked out over the weekend, the stock market should have a decent day on Monday and the bond and mortgage markets should start weaker as safe haven trades are unwound. Interest rate markets will likely continue in their respective narrow and directionless pattern with not much change by the end of the week. We do expect some increased volatility early this week based on economic releases and continuing news coming from the EU over the debt problems in Europe; Spain, Portugal and Ireland and Greece are still unresolved in the longer run. The Goldman-Sachs civil suit and now a possible criminal charge will also get attention from investors and traders this week.

It’s another quiet day in the markets, particularly in bonds. There is no relevant economic data being posted today. The stock markets are being driven mostly by earnings results. But those reports do not directly affect the bond market or mortgage rates. What usually happens is that the earnings news has a significant influence on the stock markets and the bond market tends to move against stocks. So, if earnings news is good stocks usually rise and bonds become less appealing to investors. However, disappointing earnings leads to stock selling and funds shifting into bonds. The problem is th at we have not seen the earnings reports lead to a significant move in the major stock indexes. This leaves the bond market with little to drive trading until we get to this week’s economic data.

Tomorrow morning brings us the release of March’s Producer Price Index (PPI). It will give us an important measurement of inflationary pressures at the producer level of the economy. There are two portions of the report that analysts watch- the overall reading and the core data reading. The core data is more important to market participants because it excludes more volatile food and energy prices. If it shows rapidly rising prices, inflation fears may hurt bond prices since it erodes the value of a bond’s future fixed interest payments, leading to higher mortgage rates. However, a slight increase, or better yet a decline in prices, would be good news for the bond market and mortgage rates. Current forecasts are calling for a 0.5% increase in the overall reading and a 0.1 % rise in the core data.

Late tomorrow morning, the National Association of Realtors will post March’s Existing Homes Sales numbers. A similar report to this one and actually the week’s least important data- March’s New Home Sales will be released Friday morning. Both of these releases give us an indication of housing sector strength and mortgage credit demand, but unless they vary greatly from analysts’ forecasts, I don’t think they will cause much movement in mortgage rates. Both are expected to show increases from February’s levels.

Also being released tomorrow are the weekly unemployment figures from the Labor Department. They are expected to show 450,000 new claims for benefits were filed last week, down considerably from the previous week. Generally speaking, a higher than expected number of claims would be considered favorable for bonds and mortgage rates. But, this data usually has to bring us a significant surprise to affect mortgage rates. The PPI report is by far the most important of the day and will likely set the tone for bonds and mortgage pricing tomorrow.

There is no relevant data scheduled for release today or tomorrow. This likely leaves the bond market, and therefore mortgage rates, to the mercy of the stock markets. If the stock indexes rally again like they did late yesterday, we may see bonds fall and another afternoon increase in mortgage rates. But if they remain near current levels, mortgage rates should follow suit.

There are a couple of key names posting quarterly earnings after the markets cl ose today, including Apple. If they beat analysts’ forecasts, we will probably see stock rise tomorrow and bonds fall. If the corporate earnings fall short of expectations and the stock markets post losses tomorrow, bonds should benefit as investors seek safe-haven from the volatility. That would be good news for mortgage shoppers since it should lead to improvements in mortgage rates.

Thursday morning brings us the release of March’s Producer Price Index (PPI). It will give us an important measurement of inflationary pressures at the producer level of the economy. There are two portions of the report that analysts watch- the overall reading and the core data reading. The core data is more important to market participants because it excludes more volatile food and energy prices. If it shows rapidly rising prices, inflation fears may hurt bond prices since it erodes the value of a bond’s future fixed interest payments, leading to higher mortgage rates. However, a slight increase, or better yet a decline in prices, would be good news for the bond market and mortgage rates. Current forecasts are calling for a 0.5% increase in the overall reading and a 0.1% rise in the core data.

Also Thursday, the National Association of Realtors will post March’s Existing Homes Sales numbers. A similar report to this one and actually the week’s least important data- March’s New Home Sales will be released Friday morning. Both of these releases give us an indication of housing sector strength and mortgage credit demand, but unless they vary greatly from analysts’ forecasts, I don’t think they will cause much movement in mortgage rates. Both are expected to show increases from February’s levels.

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It appears that the stock markets may fall further, which should help boost bond prices throughout the day. I would not be surprised to see the major stock indexes move lower than current levels sometime today. If this is accurate, the bond market should benefit as investors seek safety from the volatility and I would not be surprised to see mortgage rates revise lower sometime this afternoon.

March’s Housing Starts was posted early this morning, showing that new construction starts rose 1.6% last month. This was a larger increase than was expected, giving us a sign of housing sector strength. However, this data is not considered to be highly important to the markets or mortgage rates and has not influenced this morning’s rates.

The second report of the day came from the University of Michigan who announced that their Index of Consumer Sentiment fell to 69.5 this month. This was well below forecasts of a 75.0 reading, meaning that consumers felt much worse about their own financial situations than many had thought. That usually translates into consumers delaying making a large purchase and helps limit economic growth. This is good news for the bond market and mortgage rates.

Next week is moderately busy in terms of relevant economic data being released. There are a couple of important reports scheduled, including a very important inflation index. Unlike most Monday’s there is data being posted Monday that may influence mortgage pricing. March’s Leading Economic Indicators (LEI) will be released late Monday morning. Look fo r more details on this report and the rest of next week’s events in Sunday’s weekly preview.

If I were considering financing/refinancing a home, I would…. Float if my closing was taking place within 7 days… Float if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.