Wednesday, May 27, 2009

A Very Bad Day to be Betting on Low Mortgage Rates

Another bubble may have burst, this time with low mortgage rates.

DETROIT, MI – It’s an unsettling feeling watching a market in free-fall. You watch it drop, drop and drop some more, wondering and hoping that it’ll level off. When it doesn’t, panic and paranoia creep in and your stomach starts to tighten.

I’m sure a lot of bond traders on Wall Street were going through this as one of the WORST days for Mortgaged Backed Securities played out. Take a look at the chart below:

(NOTE: this chart reflects MBS prices which are the inverse of interest rates.)

As if to set the market up like a pool hustler, the day started with a bit of improvement after a bad day yesterday. Then the market kept dropping and dropping and dropping, etc.

What’s this mean for interest rates?

Well, you’re looking at rates being ½% worse than they were at the start of last week, maybe even higher.

What caused the sell off?

It was an accumulation of factors plus mob hysteria thrown in for good measure. The government’s auctioning off a slew of Treasuries this week, consumer confidence shot up last month and was reported yesterday, housing sales are up and the market was just nervous that all this will lead to inflation.

The question is, is this a reset of the markets or will the next round of bad news drive rates back down? We also have the Fed to watch and see how team Bernanke will react to this. The Fed pledged 1.25 trillion dollars to buy MBS and keep mortgage rates around 5%. They’ve only used up about half of this amount. Will they go “all in” and blow the rest on a gamble to call Wall Street’s bluff?

Stay tuned.

No comments:

Post a Comment