Mortgage rates get their cue from the mortgage backed security bond market. When bond prices go up, mortgage rates go down. When bond prices fall, mortgage rates go up. There are several items that influence bond prices including economic reports, inflation, more investment into stocks, and “technicalities” of trading such as the 25 day, 100 day, and 200 day moving average
These “moving averages” act as either a key level of support or a level of resistance for bond prices. The 200 day moving average is one of the strongest levels. Since the mid 2007, the 200 day moving average has been a key level of support for bond prices that have kept mortgage rates at 6.250% or lower.
I mention this because mortgage bonds closed at the 200 day moving average on Wednesday, and closed well below the 200 day moving average on Thursday. What had been acting as a level of support is sadly becoming a level of resistance for bond prices.
This is important because bonds have only drifted below this level on three separate occasions within the past three years. The last time bond prices broke through the 200 day moving average, it took an onslaught of bad economic news to push it back above that line. How bad was the economic news? The poor economic reports that helped break through the 200 day moving average forced the Federal Reserve to begin cutting the Federal Funding rate back in September 2007.
There will be a noticeable impact on interest rates. The rates for a 30 year fixed mortgage have traded in a range of 5.625% to 6.000% over the past 11 weeks. With the price of bonds dropping below the 200 day moving average, expect the new trading range to begin at 6.125% or 6.250%.
The next couple of days are crucial. If bond prices can rebound quickly, they may be able to push through the 200 day moving average and make it – once again – a floor of support. As optimistic as that sounds, the trend direction for bond prices is down. Barring a timely reversal, bonds and mortgage rates are going to be trapped below the 200 day moving average, and we will see a shift in the market towards higher interest rates.
Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.
