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Tue Feb 26, 2008 4:42 pm

Is there some super genius market guru that can explain to me the direct (or indirect) relationship between Mortgage rates (specifically 30 year fixed) and Bonds (specifically the 10 year tresury note)?

I've missed the boat on the low mortgage rates for refinancing my house, but now that I'm in the water i'm wondering why, how, and wtf of the rates and relationships.

Tue Feb 26, 2008 5:27 pm

The mortgage rate is NOT coupled to the prime rate, as most people think. If the Fed reduces the prime rate, people assume that the mortgage rates will decrease by the same amount WRONG.

The going mortgage rate has been coupled more and more to the 10 year bond rate for quite some time. Those who do real estate investing know that two things affect the rate you get on any real estate loan:

1) Your FICO score
2) The 10 year bond rate

Now, how does the 10 Year Bond rate move? What is it coupled to? Well that is easy:

If the Market (Wall Street, DOW Jones, NYSE whatever) has a good day then money will be FLOWING into stocks, makes sense right? Well if you are a BOND manager, you need to intice people to put their money into your bond, so you INCREASE your return rate, if the Market has a DOWN day, then money naturallly flows into bonds, and you don't need to pay as much of a premium for people to put their money in the bond market, and thus the rates go DOWN.

Usually the Mortgage rates lag market movement (bond rates) by 24 hours or more, but recently the rates have been almost as touchy as the market. I had an investment loan quoted to me at 5.125% on a Wednesday afternoon (a couple weeks ago) and by the time I went to firm up the loan on Friday, it had balooned to 6.0% due to a couple of good Wall street days.

I'm no super genius market guru, I don't even play one on TV, but I do watch the 10 year bonds and my FICO score like a hawk, since these dictate how much the bank will charge me to use their money, and that is the life blood of real estate investment.

Tue Feb 26, 2008 5:30 pm

Wow does this hit home for me. I just cant figure this stuff out - why on earth are the yeilds raising on a 30 year fixed while the fed rates are going lower?

This is a very complicated question and issue that our govt is trying to figure out also. There is a senate committee meeting this Thurs on the subject.

Read this link I just found - its heavy, but it tries to explain the problem and look for potential causes.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUy1SnMXNMVA&refer=home

Tue Feb 26, 2008 5:31 pm

By the way, it goes without saying that if the bank has to PAY out more money on deposits (like 10 year bonds) then it needs to CHARGE more when loaning that money out to someone in the form of a Mortgage. If they don't have to pay out as much, then they can lend it out for less.

The bank needs to maintain a margin of profit between what it pays for capital and what it makes off capital.

Clear as mud?

Tue Feb 26, 2008 6:18 pm

Right now, bond investors aren't convinced that inflation isn't a problem, he said. The yield of 10-year Treasury notes climbed to 3.88 percent from 3.43 percent on Jan. 22.

Washington-based Fannie Mae and Freddie Mac, the government- chartered companies, are expected to report quarterly losses this week.

Investors in mortgage-backed securities guaranteed by government-linked entities such as Fannie Mae also are demanding higher yields over Treasuries and other benchmarks as competing investments offer greater returns. Spreads on so-called current- coupon agency mortgage securities, whose yields determine interest rates for prime loans below $417,000, have reached the highest since the 1980s, according to UBS AG.

The extra yield that investors demand to own agency mortgage- backed securities over 10-year U.S. Treasuries rose to an eight- year high of 1.94 percentage points this week, up 0.59 percentage points from Jan. 15.

``Lowering fixed rates and making it easier to get a mortgage is the best thing Bernanke could do for housing, but it's the one thing he has no direct control over,'' Shaughnessy said. ``The only thing he can do is try to reassure the market.''

Tue Feb 26, 2008 7:57 pm

I was meeting with my bankers today. I asked specifically how the rates went from 5.15 to 6.45 without much movement in the long term index. She changed the subject quickly.

Tue Feb 26, 2008 8:12 pm

Thank you derv and turbo-g I learned a lot in the past 2 weeks, but your explanations actually clarify it quite a bit.

I'm hoping for the 24 hour lag because I've got 2 weeks to close. And at any time in the 2 weeks I can call and lock it in. So, right now I'm gambling and watching the market, trying to outguess everyone else as to what is going to happen. I've started investing in my 401K and have other market investments. It's fun, so long as you're not losing your shorts or rely on it for income.

The local bank I'm using has a 30 fixed at a rate just slightly higher than the national average, specifically bankrate.com. They don't have the cheapest loan fees around but they make up for it in several ways. 1. They never, ever sell the loan. 2. They are a local bank and jump through hoops to services our accounts and loans. 3. They will answer any question right up front, never hide anything. 4. They will always work with you and never push you around. 5. We've banked with them for 40+ years and the bank president knows us by name.

Still, my wife wanted to lock things in back when it was at 5 3/8ths and we didn't. So I'm in the dog house right now. Although our loan is small, about 1/2 the value of our house every full point is roughly 100$ a month out of our pocket. I keep telling her that even if we lock it in at 6.25 it's still lower than what we have now. And we are refinancing because we are doing an addition, or else we'd just keep the loan we have now.

Wed Feb 27, 2008 8:00 am

Vanhag wrote: TSo I'm in the dog house right now. Although our loan is small, about 1/2 the value of our house every full point is roughly 100$ a month out of our pocket.

The futures markets are pricing a 95% chance of a 1/2 point cut in the Fed Funds Rate at the next meeting if that's any help.

Unfortunately the linkage between the Fed Funds and the Mortgage rates have broken down, and there's no guarantee that a Fed cut will translate into lower mortgage rates.

In a nutshell, the problem is no one knows how to measure risk at the moment. If I'm an investor I can go out and buy Treasury bonds and get (let's say) 3% guaranteed by the full faith and credit of the US Government-- safe and secure.

Or, I can buy mortgage debt and get, maybe 6%, but to get that higher yield I assume additional risk of loss. Right now no one knows how much additional risk that involves because no one knows how much lower the real estate market will go or how much higher the default/foreclosure rates will go. Add in the fact that the Dollar is dropping like a rock in the world currency markets, some of the banks are in trouble, the bond insurers are in trouble, the bond rating system has broken down, oil is at $100 a barrel, inflation is running at 4% (2X where it was last year) and we're heading into a recession, and there's just one hell of a lot of variables (all bad) you need to consider before you buy mortgage debt right now-- that 3% guaranteed looks pretty good by comparison.

Basically, every time the Fed cuts rates right now it isn't doing anything for the consumer, it's helping increase the yield to the investors, and the hope is that eventually the spread will get so fat that greed will take over and investors will start buying mortgage debt because the yield is just too high to not take the gamble. Trouble is the Fed has already cut several times and it's pretty obvious that we're not at that sweet spot yet.

It turns into a giant game of "Lets Make a Deal" and right now investors are sticking with the safe 3% inside the box and aren't willing to trade it for whatever might be behind the curtain.

It's all a gamble. If anyone knows where rates are heading they aren't on The Samba (or working for your local bank), they're making a million bucks trading on Wall Street. If you can live with the rate that's on the table it's probably worth taking it.

Wed Feb 27, 2008 10:04 am

Thanks coad, the local rate today went down a bit. The 10 year bond yield was down yesterday so it seems as though at least 1 of my mini-predictions was right. Or I just got lucky.

Unless bond yields take a tumble today we're going to lock in our rate today at 6.125. And right now the bond is up so......

BTW my 401K took a hit the last 2 quarters. But since everything is down, I'm slowly buying. I'm in it for the long haul, not short term.

Wed Feb 27, 2008 11:15 pm

Vanhag wrote:
BTW my 401K took a hit the last 2 quarters. But since everything is down, I'm slowly buying. I'm in it for the long haul, not short term.

The best advisors I've hear from have always said- if you're in it long term and have some time to build- that you're only supposed to invest in your 401k enough to max out your employers 'match'.
Anything else you would have invested should be used to pay down debt if it has a rate above 4%.
I've seen a few people do pretty well on 401k's, but I'm lead to believe that down the road NOT having that mortgage is much more valuable than having the 401k $ in the bank. Thinking back to my economy and accounting classes makes me throw up in my own mouth, . ...I was no good at it.

I've also been following the FED rate vs Bonds- i think I heard the long term treasury bonds were turning into an attractive investment, as opposed to the Stock market, and that only happens when the rich people expect the worst (?) from the economy for a long time.

Thu Feb 28, 2008 9:38 am

And today everything took a tumble, rates are back down. We tried to lock in the rate yesterday afternoon but our loan officer had to go to the hospital because her son took a tumble at the playground. We were a little put off because everyone in the loan office was out on an emergency.

But today the rates are lower. I told my wife to just lock it in and be done with it. When once she was mad at me for not helping to get things done and locked in at 5 5/8ths today she said, well maybe we should wait for 1 more day, just to see.

I've moved on to construction plans, I need to focus on how big of an outside door I need so I can pull my vw into the livingroom of the new addition.