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 â€œMortgage Rate Bubbleâ€ a long time ago. Others are now using the â€œBond Bubbleâ€, 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 havenâ€™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 whatâ€™s going on say. In case you donâ€™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 â€œmediaâ€, such as Jim Cramer (CNBCâ€™s Mad Money)?
Well, yesterday and into today, news of Standard & Poorâ€™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 â€œMortgage Rate Bubbleâ€ pop. Letâ€™s just say there are some pins poking into the bubble right now. What are they? Take a lookâ€¦
Standard and Poorâ€™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 & Poorâ€™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 USAâ€™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 â€œMortgage Rate Bubbleâ€ 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 letâ€™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 hasnâ€™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 Fedâ€™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 USâ€™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 farâ€¦
â€œIf you have been planning to refinance your mortgage or even purchase a home this year, do it now, before it is too late.â€