To begin with, letâ€™s analyze what has been happening to mortgage rates since my last post on the subject, just below and dated May 22, 2009. Since then, mortgage backed securities have plummeted after breaking below their recent trading range on May 23. While they have made back some ground, their virtual freefall has changed the overall outlook for mortgage rates, and may very well signal the beginning of climbing mortgage rates. The question in my mind these days is how high will they go and just how fast. Taking a look at the charts below will show just how fast they got worse and the potential speed at which they could rise in the coming months, if not years.
The above charts are snapshots (via Mortgage Market Guide) of the market from Wednesday, even before the close for the day. Thursday saw MBS pricing drop and hit their 200-day moving average before beginning their retracement to todayâ€™s levels. The chart on the left covers the last month, while the one on the right spans the last 6 months, showing we have seen mortgage rates at the same levels as 6 months ago, before the Fed started purchasing mortgage backed securities and artificially manipulating the markets and creating the â€œMortgage Rate Bubbleâ€ potential.
So what lies ahead?
While inflation is the archenemy of mortgage backed securities and mortgage rates, and we will get back to it later, other issues are taking place that could ensure the steady climb of mortgage rates. One of the biggest factors can be seen by looking to the Far East, particularly China and their actions. But while Chinaâ€™s actions may be raising alarms, their actions are simply reactions to what our government is doing. And the US governments response? Typical politicians, empty promises.
So what has China been up to. For starters, they have backed out of buying longer term US debt instruments, including mortgage bonds. They remain part of the purchasing of short term US Treasuries, but they are opting to buy gold versus US debt. They have even been voicing publicly their concerns of the USAâ€™s ability to back their debt up, something that Standard & Poors, the rating agency has also noted in their talks of the US losing its AAA rating.
Is China really concerned that the US canâ€™t repay their debts? Not necessarily, rather they are concerned about what that debt will actually be worth after the US government has finished debasing the dollar through its current monetary policy of â€œquantitative easingâ€. Yes, the more and more our Federal Reserve and Treasury Department throw good money into the markets in a feeble attempt to fight a recession, the less the dollar will likely be worth. (And why are we fighting a recession anyway since it is part of a healthy economic cycle?) Since the US switched to the current fiat currency system in 1971, the purchasing power of the US dollar has dropped 81%. It is down 94% since 1933 and the breakaway from the gold standard. With the printing presses running 24/7 these days, chances are the dollarâ€™s value is going to drop significantly, which we have already been seeing recently as the euro, pound, and other currencies are hitting highs for 2009 and looking to break to new heights again.
And getting back to inflation. While the dollar continues to lose its value, aided by Big Ben Bernanke and his buddies whom think that debasing the dollar will get us out of this mess, guess what results we receive? Yes, thatâ€™s right, inflation (if not hyper-inflation). We can see it in the recent run-ups of oil, gold, and even silver. You can bet that the next set of inflationary data is going to reflect the results. And since inflation is the archenemy of mortgage rates, the most likely result is higher mortgage rates.
But wait, the Fed has been buying up mortgage bonds to drive mortgage rates to 4.0% (Jim Cramer of Mad Money on CNBC even praised the Fed for their actions) and save the housing markets. First off, the Fed can buy MBS, but the markets dictate prices and thus mortgage rates. That reason is the beginning of why the Fed needed to buy MBS, it being the only way to artificially drive mortgage rates down. They were successful at bringing the rates down, though not as low as the media and everyone wanted. And now? Well, the Fed has cut back on their MBS purchasing, part of the reason for the rapid increase in mortgage rates we saw last week.
How Certain Are Mortgage Rates Moving Higher?
Part of the reason mortgage rates are headed higher can be seen in the MBS pricing charts. Just like any other type of security, the charts create patterns which tend to be indicative of future movement. Most recently (namely the last 6 months, MBS pricing has essentially been in a sideways trading range and mortgage rates have been fluctuating somewhat, but remaining low overall. Now, as you can see, that trading range has been violated and a new trend will take place after some corrective movements occur.
The pattern most likely to form based on economic issues and the view of the charts is a downtrend in pricing, or an uptrend in mortgage rates. Can the Fed stop it? Maybe, but I wouldnâ€™t bet on it. Traders are already demanding higher rates of return on their money to hedge against inflation risks and that demand will likely continue to grow, resulting in higher mortgage rates in the future.