Follow the Leader: Rates Surge After Fed Decision

by Alex Stenback on September 17, 2008

The sound and the fury Yesterday afternoon was mortgage rates jumping after the FED elected not to cut interest rates.

You read that right.  The Fed did not adjust the Federal Funds rate, (it remains at 2% ) yet mortgage rates jumped, enough to wipe out the post Lehman gains we saw Monday.

There’s a couple of reasons for this, but the key take away is something we’ve harped on a lot around here – the Fed does not control mortgage rates.  Mortgage rates are based on the price of a mortgage bond, or mortgage backed security.  These prices, and by extension mortgage rates, are determined by the market – mainly big name Wall Street firms and large institutions trading with one another.

In fact, more often than not, Mortgage rates lead the Fed, falling well in advance of cuts, and rising in advance of hikes.  Now, that is not a hard and fast rule, but it usually works out that way.

Among the Factors that caused Yesterday’s jump (recall: when the price of a mortgage bond rises, rates fall.  When prices of mortgage bonds fall, rates rise.)

  1. AIG: The rumor-then-reality of a Fed bailout of AIG buoyed investors, who rotated money out of the safe harbor of the bond market and back into stocks and other investments.
  2. The market had (perhaps) priced in a Fed cut, and when it did not materialize, the prices of mortgage bonds fell, forcing mortgage rates up.
  3. Bank selling.  Because mortgage bond prices have improved, and nearly every bank is in need of capital, they used this as an opportunity to take some money off the table by selling.

Another lesson on the unpredictable nature of the mortgage market, and how *fleeting short term dips in rate can be. 

*By the way, if you got caught napping and missed an opportunity, you can keep up with intra-day rate movements by subscribing to my twitter feed right here.

{ 3 comments… read them below or add one }

Dan September 17, 2008 at 10:29 pm

Fed has nothing to do with long term rates, its the bond yields on 10 year Treasury that determine rates. (Symbol TNX).

Alex Stenback September 18, 2008 at 11:24 am

Dan – You need to work on your reading comprehension skills.

My point was exactly that the Fed has nothing to do with mortgage rates.

And if you think the ten year Treasury is what mortgage rates are derived from, then I feel very, very sorry for your customers.

Readers: Take this as an example of how many loan officers are out there that have no earthly clue what is going on.

richard September 18, 2008 at 3:06 pm

Glad to see someone understands how mortgage rates work, and I appreciate your addressing this topic. Media coverage of the Fed, as if the chairman had a magic wand, is absolutely nutty.

Right now, the X factor I’m worried about concerning mortgage rates is the US Dollar. Don’t know how many of these mega-billion handouts it can bear before it gives up its recent gains — and that would create more upward pressure on interest rates.

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