Major market participants, just like individual investors, are constantly searching investment opportunities that will provide the greatest return with the least amount of acceptable risk. Investment products inherently all possess some sort of risk. For example, one risk associated with mortgage-backed securities, the bonds that directly dictate fixed rate mortgage pricing, is a fear of pre-payment. A homeowner obtains a loan for a certain duration of time at a certain interest rate. As interest rates fall, homeowners tend to refinance their homes, which leads to the early payoff of the first loan and the origination of a new loan at a lower interest rate. Investors are cognizant of this scenario and factor this risk into their demand for mortgage-backed securities. If the demand for MBS’s is strong, the prices of MBS’s increase leading to lower mortgage interest rates. However, if the demand for MBS’s weakens, mortgage interest rates rise. Continued gains in the US stock market add to the competition for investors’ funds. In addition, Treasury securities also provide competition and thus volatility.
Oftentimes stocks and bonds exhibit a general trading pattern or direction. Last year, bonds steadily increased pushing mortgage interest rates lower. Unfortunately, the recent pattern has been a wild and almost constant up and down motion resulting in a general increase in mortgage interest rates. Therefore a cautious approach to lock decisions is necessary to protect against future volatility.
All our best for the upcoming week.