After a good start to last week, we faded on Friday and that gave way to rising rates over the weekend.  They are rising yet again this morning.

As we've discussed, mortgage rates are directly connected to the trading of Mortgage Backed Securities (often referred to as MBS), which are analogous to treasury bonds.  MBS also tend to follow along with treasuries, although they can sometimes move in opposite directions depending on data.  At any rate, the entire bond market, which includes treasuries, MBS, and other fixed income securities, is moving lower in price.  Lower prices mean higher yields, which are interest rates.

After an appreciable decline in the stock market last week, and with MBS reaching near term historical highs, the market was primed for this reversal.  Still, stocks have certainly not risen enough to justify the decrease in bond pricing.  This is a sign that money is actually moving to the sidelines as traders are either seeking other havens or increasing liquidity to prepare for uncertain market movements.

The good news is that there is not any extremely bad news for MBS.  The only real problem for MBS right now is inflation.  Inflation is a problem for all fixed income investments because fixed income pays just that, a fixed return based on money invested today.  So if a dollar tomorrow is worth less than a dollar today (inflation), fixed income returns suffer.  The only way to counteract this is for investors to raise their yield expectations (and recall that yield = interest rates).  So in a nutshell, that's why we have both treasuries and MBS moving lower in price this morning (sellers have to lower the price, effectively increasing the yield because more can be bought with less, in order to entice inflation-wary traders to buy).  This is a gross oversimplification of supply and demand in the MBS market, but a major component nonetheless.  

Some think that fixed income will continue to degrade due to inflation.  The nice thing about that is that MBS have the opportunity to perform better than treasuries because they have a higher yield due to their higher risk.  Additionally, some think the market has "over-prepared" for a recession and now has room to improve.  Any time there is positive sentiment for a growing economy and especially for the stock market, money tends to be pulled out of bonds, which again, forces sellers to lower their prices thus raising interest rates.

Others think this is just a blip on the way down.  Fed Funds Futures (basically a betting pool on where the Fed will move their benchmark rate) are pointing to a better than 50% chance of a rate increase next meeting.  This would ease some inflation concerns and the analysis could again be focused on other economic data. 

Certainly there will be weak points in the economy in the weeks and months to come.  The question is whether or not there will be enough weak data to keep mortgage rates low.  The stock market seems intrinsically optimistic, often using even the slightest positivity to make gains.  With the Dow trading from the low 12,000's to the low 13,000's for quite some time, the market is just itching for some news to take it firmly back above 13,000.  This will be bad for mortgage rates.  The dark horse for stocks could be the consumer.  Consumer data is as weak as it's even been, so stocks will have to find someone other than end users to drive the economy.  Good luck with that.

Still, it could go either way.  Historically, rates are still very good.  There's simply no telling what will happen next in this tumultuous market, so any time you have the opportunity to lock with rates near historical lows, it's a safe bet.