Mortgage rates are determined by the prices of mortgage bonds; this, we've covered before. As bond prices go up, bond rates come down. And the price of a mortgage bond is a matter of Supply and Demand.
The greater the demand for a bond, the higher its price. High demand for bonds is one reason why mortgage rates remained relatively low for the period spanning the last few years.
That period may be ending soon.
In August 2007, for the first time since 1998, foreign nations sold more long-term U.S. securities in a month than they bought, thereby increasing the market supply. This happened for a number of reasons including:
- The Federal Reserve lowered the Fed Funds Rate
- Fear of a U.S. credit market collapse
- General uncertainty about the strength of the U.S. economy
When the supply of securities outweighs its demand, there is a downward pressure on the price of that security. This is one reason why mortgage rates trended higher in August and September; the excess supply of mortgage bonds forced mortgage bond prices to drop and that, in turn, pressured mortgage rates higher.
Worth noting is that the top two holders of U.S. debt -- Japan and China -- trimmed their holdings in August by 4.1% and 2.2%, respectively. If Japan, China and other nations continue this trend of selling U.S. debt in the months ahead, mortgage rates will continue to feel the pressure to move higher.
If all of this sounds "foreign", remember that, like the price of a stock, mortgage rates are not divined from thin air. Rates come from the price of mortgage bonds -- nothing else.
And, those prices are determined by simple Supply and Demand.
Source
Bond Market Update
Briefing.com
October 16, 2007
(Image courtesy: Directopedia)
