Comments Off on Looking Back And Looking Ahead : April 21, 2008

Looking Back And Looking Ahead : April 21, 2008

2008
04.21

The S&P 500 added 4.3 percent last week — more than during all of 2007 — in what was a good week for the economy and a bad week for mortgage rate shoppers.

After Friday’s close, mortgage rates were higher by as much as 0.375% versus the Friday prior. This reversed a trend of falling rates for Americans.

In recent weeks, mortgage rates had been falling as investors fled risky stocks and parked their money in the bond markets.

A trading pattern such as this one is sometimes called “Flight to Quality” and it creates a high demand for all types of bonds. When bond demand is high, bond prices increase and that drives bonds’ relative rates of return down.

Over this past week, however, the Flight to Quality unwound.

Investors saw opportunities for stock market gains and funded stock purchases by selling bonds that they had amassed over the weeks prior. This created an imbalance of bond supply versus bond demand and that caused bond prices to fall.

Naturally, the corresponding rates of return on the bonds rose.

The supply and demand of mortgage bonds helps determine ratesAnd so, because mortgage rates are really just “rates of return” on mortgage-backed bonds, we can understand why mortgage rates suffered last week as the stock markets were gaining.

It wasn’t anything fundamentally bad in the bond market as much as it was the attraction of stock market gains.

This week, there won’t be much economic data to cross the wires but 160 companies in the S&P 500 will report their earnings. This could have a broad impact on mortgage rates, similar to last week.

If corporate earnings are stronger-than-expected, expect mortgage rates to continue higher as additional monies flow into stocks at the expense of bond markets.

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