Money leaving the stock market helped mortgage rates move lower yesterday. As the Dow swung from a 140-point gain to a 140-point loss in a matter of hours, dollars were looking for a place to "park". Mortgage bonds were one beneficiary.
When investors sell stocks in a portfolio, they don't always want to keep the resultant cash sitting in their bank account. In search of higher returns, bonds are often an attractive follow-up investment.
This process is sometimes referred to as "flight-to-quality" -- dollars leaving risky investments like stocks and moving into safer bets with more predictable returns.
The safest of all bets is a U.S. government-issued bond called a treasury that is practically guaranteed, and therefore, is considered to be risk-free.
Mortgage bonds carry slightly more risk than treasuries, but that is why their rate of return is a little bit higher, too.
As demand for mortgage bonds increase, mortgage rates fall and that's what we saw happen yesterday. Today, the stock market opened with a small gain and mortgage rates are giving back some of Tuesday's improvement.
