As global credit markets deteriorated in October, mortgage markets displayed an unnerving amount of volatility. Last week was no different.
But, unlike in previous weeks in which rates improved on some days and worsened on others, mortgage rates were mostly higher last week, finishing the month on a surge.
The biggest reason why mortgage rates rose last week is that hedge funds and other investors are still hard-pressed for cash and are dumping their mortgage-backed bond portfolios into the market. The excess mortgage bond supply drove prices lower last week, which, in turn, caused mortgage rates to rise.
However, forced selling by hedge funds wasn't the only force working against mortgage rate shoppers last week.
In a move meant to stimulate the economy, the Federal Reserve cut the Fed Funds Rate to 1.000 percent -- the same level widely attributed to starting the global credit crisis several years ago. Low interest rates may stimulate the economy in the short-term, but long-term, they can lead to runaway inflation.
This is terrible for home buyers because inflation causes mortgage rates to rise.
Looking ahead to this week, mortgage markets have a lot of information to digest.
First, there will be four separate speeches from members of the Federal Reserve, plus one appearance by Treasury Secretary Paulson. In each speech, each mention of the word "inflation" will cause mortgage markets to flinch and rates to tick higher.
In addition, Friday is the first Friday of the month which means that the Employment Report hits the wires.
Because markets expect to see high unemployment rates, they're also predicting a slow holiday shopping season. If the jobs data is stronger-than-expected, expect stock markets to gain and mortgage markets to lose, pushing rates higher.
And, lastly, Tuesday is Election Day. Presumably, markets already priced in the likelihood of either candidate winning the election. However, as the voter's President-elect becomes clearer throughout the day, expect volatility in rates as traders rush to change their positions.
Mortgage markets should move a lot Tuesday -- we just won't know in which direction until it happens.
(Images courtesy: The Wall Street Journal Online)
