Is the Mortgage Rate Bubble About to Pop?

by Florida's #1 Mortgage Planner on May 22, 2009

If any of you have been following my work, especially over at Florida Mortgage Daily where I post regular mortgage market commentary, you knew I coined the next bubble the “Mortgage Rate Bubble” a long time ago.  Others are now using the “Bond Bubble”, focusing on Treasuries and not mortgage backed securities and mortgage rates, but it is essentially going to happen the same to MBS as it is to Treasuries.  So, just what is it and when is it going to happen?

First off, just in case you haven’t been following me for a long time, you need to understand that mortgage rates are derived from the mortgage backed securities market and they do not follow the 10-year Treasury Note like many mortgage professionals, real estate professionals, and others trying to act like they know what’s going on say.  In case you don’t believe me, take a look at this picture snapped about a  week ago when the T-Note was actually trading dramatically opposite mortgage bonds!!  Still think mortgage rates can be tracked by those watching the 10-year Treasury Note?

Again, for those whom have not been following my work, I have explained that the archenemy of mortgage bonds (MBS) is inflation and that inflation will eventually arise and attack the markets.  But there are other factors, news and economic data among the greater forces, that drive yields on mortgage bonds and ultimately mortgage rates.  Did you notice how mortgage rates have climbed since yesterday morning, after they appeared to be in good shape?  Still waiting for those 4.5%, 4.0% or even lower mortgage rates to show up as promised by the “media”, such as Jim Cramer (CNBC’s Mad Money)?

Well, yesterday and into today, news of Standard & Poor’s actions have been making the headlines and some other more subtle things are occurring that you should be aware of, all of which will help the “Mortgage Rate Bubble” pop.  Let’s just say there are some pins poking into the bubble right now.  What are they? Take a look…

Standard and Poor’s is a rating agency, most of you have probably already heard of them from the news over the last year.  But what you may not know is that they rate government debt like they do corporate debt and that is what is raising concerns right now.  You see, yesterday, Standard & Poor’s threatened to take away the AAA rating of the U.K., which essentially means that their is more risk of failure to repay that debt.  This then translates to investor demand for higher yields on that debt to offset the added risk, and higher yields when associated with mortgage backed securities equates to higher mortgage rates.  To make matters worse for our own mortgage rates, Standard & Poors also stated that the USA’s rating of AAA is in jeopardy as well. 

If you watched all of the markets yesterday, and even into today, you would have noticed a fairly rare occurrence and one that may signal the “Mortgage Rate Bubble” popping. Typically, when the stock market drops, Treasuries and mortgage bonds see their yields drop as well (as their prices climb).  That was not the case yesterday as stocks dropped and mortgage rates climbed!!! 

Adding to the problems for mortgage rates is the fact that the Federal Reserve has cut back on their MBS and Treasury purchasing.  In fact, during an auction yesterday, the Fed only purchased $7.3B, or roughly 16% of the total debt offered, which is down from 30% at an auction earlier this week.  Yesterday also saw the Treasury announce another $162B of debt that will flood the markets next week.  That brings the total marketable U.S. debt to around $6.3 trillion and just who exactly is going to buy all this up?  China?  Think again, but that story is for another blog if I can get to it, but let’s just say that a collapse of the US dollar may be imminent.

So why would mortgage rates keep climbing in this economic environment, even when inflation hasn’t even come forth as a problem yet?

The 10-year T-note has passed through its 200-day moving average, raising concerns that the upcoming supply flood, along with the Fed’s quantitative easing measures, will bring forth overwhelming challenges for the Treasury market, and that will likely spill over into the mortgage backed securities market.  In fact, most likely the only hope the markets have a chance to maintain current mortgage rates is if the US’s macroeconomic data gets more alarming than it is, which has not been the case and does not look like it will for the foreseeable future.  For those that have not been heeding my warnings thus far…

“If you have been planning to refinance your mortgage or even purchase a home this year, do it now, before it is too late.”

{ 3 comments… read them below or add one }

Karl Christen June 8, 2009 at 7:39 pm

Well, Obama care has finally pushed us to the brink. Yes, the MBS market is done! Put a fork in it! Question is how far will rates go before they do match US Bond pricing. Your right that MBS and Treasuries are not related, but historically Treasury yields do track closely to MBS pricing.

My feeling is that the Fed is realizing that the economy is beginning to revive, though I’m sure they realize if they continue to pump dollars into the economy, that this will flood the engine with inflation and so much for any recovery.

If they totally take their foot off the gas, then the engine could cough and die, which then put’s us back into a deflationary crash, much like the 1930’s. The problem is the government should have never got involved in the first place.

Mortgage bubbles, Treasury bubbles, and government spending bubbles, it’s the recipe to economic collapse. Can someone pass the Jack Daniels…

Robert D. Ashby June 9, 2009 at 2:08 pm


Thanks for stopping by as it is always good to see your expert opinion. If we follow the way of the Great Depression, the next crash will likely be in 2011 with the world thinking the economy is doing OK up until then. Personally, I think the next crash will come much sooner. If we also look at bubble history, most of their creation leads back to government actions.

Inchirieri Apartamente June 26, 2009 at 3:40 am

I agree with Karl when it says : ” If we follow the way of the Great Depression, the next crash will likely be in 2011 with the world thinking the economy is doing OK up until then. Personally, I think the next crash will come much sooner. If we also look at bubble history, most of their creation leads back to government actions. “

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