Tuesday, February 1, 2011

How Are Mortgage Rates "Made"?

For Conforming Mortgage Rates, The 10-Year Treasury Is A False Proxy

Mortgage-Backed Bonds vs 10-Year Treasury August 2010
I don't care what you've been told and who might have told it to you.  You can't watch the 10-Year Treasury and use it to predict mortgage rates.  Mortgage rates are based on the price of mortgage-backed bonds and bonds don't move like treasuries.
If bonds moved like treasuries, this chart would be linear. Clearly, it's not.

How Are Mortgage Rates "Made"?

Making mortgage rates is a simple process. It's the result of a based formula based on the "going price" of a mortgage bond.  As it relates to conforming mortgage rates, the bond in question is issued by Fannie Mae. For FHA, it's issued by Ginnie Mae.
In both cases, however, there's an important, implicit corollary.
Because mortgage rates are based on the price of mortgage bonds, it follows that mortgage rates, therefore, cannot be based on the price of anything else. This includes the 10-Year Treasury Note.
If you want to know where mortgage rates are headed, you have to watch the mortgage-backed bond market. That's fact and it's provable.

10-Year Treasuries Are A False Indicator

In defense of the 10-year treasury, it's got a terrific, long-term correlation to mortgage bonds.  And perhaps that's why the media likes to link the two.  That makes sense to me.  But, the issue here is that people watching mortgage rates aren't in it for the "long-term" -- they're decidedly short-term.
Over the short-term, the long-term correlation between treasuries and mortgage bonds means squat. The two are as different as apples and the early work of Raymond Carver.
On same days, pricing moves in the same direction; on other days, it moves opposite.
But, perhaps, what's most telling is that there was just one day last year on which the 10-year treasury note and the current Fannie Mae coupon made the exact same move in the exact same direction.  Just one.  Every other day, the two were different.
In other words, you can't use the 10-year treasury as an MBS proxy. It fails.

Where To Get Mortgage-Backed Bond Information

Another reason why people watch the 10-year treasury is because it's so dang easy to find it. Just turn on any business television program and the 10-year shows up in the crawl.
By contrast, mortgage-backed bond data is more elusive. You don't see it on TV and you rarely catch it in print. It's expensive to access MBS data but you can get summaries for free. If you're not following me on Facebook, click here to "like" the page to which I publish MBS updates.
If you're in the market for a mortgage, my Facebook page will give you a better feel for whether rates are rising or falling than you'll get from watching the 10-year, plus you'll receive important market pricing warnings as they happen.

Is It Time To Lock Your Mortgage?

The best part about watching mortgage-backed bonds is that you always know when conforming rates are about to get better, or worse. It maximizes your chances of timing the mortgage market just right.
Now, a lot of people don't want the hassle of tracking bonds. That's fine. Click here and it will send me an email -- I'll watch your bonds for you.  And then, when it's time to lock your rate, I'll handle that, too.  You won't have to worry about a thing.
I'm licensed in many states and answer all my own emails. Let me know how I can help

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