Market Comment
Mortgage bond prices rose last week pushing mortgage interest rates lower. The gains came following some stock weakness, signs that unemployment may rise, and better than expected productivity. Increased productivity allows companies to produce more with the same labor input. This helps keep costs in check and alleviates inflation fears.
For the week interest rates fell by about 3/8 of a discount point.
The Fed "Beige Book" will be the most important data this week. The Treasury auctions will also set the tone for mortgage interest rates. Strong foreign demand could result in mortgage interest rates improvements.
Auctions
US Treasury bonds do not directly dictate fixed mortgage interest rate pricing however they do have an indirect impact. Both Treasuries and mortgage bonds often track in the same direction but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely.
Despite the overwhelming size of the US economy, foreign investors can still have an effect on moving the financial markets. When foreign economies struggle foreign investors often purchase US based investments including mortgage bonds. This demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying was one of the factors that helped mortgage interest rates to remain historically low in years past.
There is a real threat that continued global economic turmoil might keep foreign investors from purchasing mortgage bonds in the future. The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated securities. If this week’s auctions are poorly bid mortgage bond prices could fall pressuring mortgage interest rates higher.
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Samuel Meekins III
Monarch Mortgage
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