The Little-Known Reason Why Mortgage Rates Are Rising This Week (And Why They May Go Higher Still)
Posted: 30 Jul 2009 08:00 AM PDT
It started mid-day Tuesday and the culprit is Basic Economics. Here's why.
Mortgage rates are based on the price of mortgage-backed bonds and -- like most things -- mortgage-backed bonds prices are based in Supply and Demand.
When bond supplies grow faster than the corresponding demand for them, bond prices tend to fall and when bond prices are down, bond yields are up.
Meanwhile, this week, the U.S. Treasury is making its largest weekly auction in history. $115 billion in new debt, to be exact. This means that before the week is through, $115 billion in new bond supply will have been introduced into the market and -- so far -- demand hasn't kept pace with the new supply.
Prices are plunging.
For home buyers and rate shoppers, this is especially bad news because mortgage-backed debt is less desirable to investors than is treasury debt. As a result, when treasury debt loses values, mortgage-backed debt tends to lose value, too. Not always, but most of the time.
So, beginning with Tuesday afternoon's auction, debt supplies have been growing faster than buyer demand.
Bond markets are suffering from an abundance of debt supply and it's been a big reason why mortgage rates are rising. The week's not over yet, either. $28 billion is due for auction Thursday.
If demand at the auction is similarly low, watch for mortgage rates to spike again.
