Rate cut relation to mortgages?

Sparohok · Jan 29, 2008

Quote from Cache Landing:

You're dreaming. The TY yield is based on supply/demand. High demand for the TY means lower yields.
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The flight to safety you're observing is a short term phenomenon. Only a trader would make that correlation. A short term stock market rally on the back of a Fed cut has no long term impact on the yield curve.

Martin

Sparohok · Jan 29, 2008

Quote from Cache Landing:

The lowest a 30-year fixed mortgage can realistically get is 5.0%. That would correlate with a 10-year note at about 3.5%. The reason is that in order for it to get that low, people must invest heavily in 10-year notes. Nobody in their right mind is going to invest in 10-year notes that are returning less than 3.5%
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Tell that to the Japanese.

Martin

Optionpro007 · Jan 29, 2008

Quote from Cache Landing:

I'll refer to the 10-year as TNX because that is the ticker used to track yields.

There isn't a natural ceiling for TNX as you can see from 1982.

The biggest influencing factors for TNX is inflation and investor fear. The FF rate has only an indirect relation because th FED drops rates during a falling market. It was the falling market that caused the TNX drop, NOT THE FF DROP.

Inflation has been on an overall downtrend since the early 80's, but that is likely to change as Jayford noted.

On a daily basis the main factor for TNX is investor fear. If people freak out and start selling, there will be a big move into bonds again, causing TNX to drop. This means lower mortgage rates.

OTOH, if people become confident that the FED will save the market, then there will be a shift out of bonds and into stocks. While the stock market rises, TNX will also rise and mortgage rates will go higher. It really is that simple.

I should throw in one more statement. If inflation picks up it will cause the FED to stop dropping rate and probably increase rates. This will cause a market drop which would normally result in TNX falling. However the increased inflation fears will cause a TNX rise that offsets this causing a rise in TNX instead of the expected drop.

If you're wanting to get a mortgage there is not a better time.
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Thanks for clarifying.

I think I didn't phrase my question correctly, I apologize.

If yields on TNX can't go much lower then 3.5 as per your first post, (good reference is 7/03 when FF was at 1%) does this mean that the 10 note also has a ceiling i.e., it will not go much higher than the 2003 high unless the FF were is lowered to under 1%.

Is this correct? It sounds too fixed.

Cache Landing · Jan 29, 2008

Quote from Sparohok:

The flight to safety you're observing is a short term phenomenon. Only a trader would make that correlation. A short term stock market rally on the back of a Fed cut has no long term impact on the yield curve.

Martin
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The OPs question seemed related to a short-term relationship, and wondering why the 0.75% cut resulted in a rise in mortgage rates. I explained it thoroughly.

Cache Landing · Jan 29, 2008

Quote from Optionpro007:

Thanks for clarifying.

I think I didn't phrase my question correctly, I apologize.

If yields on TNX can't go much lower then 3.5 as per your first post, (good reference is 7/03 when FF was at 1%) does this mean that the 10 note also has a ceiling i.e., it will not go much higher than the 2003 high unless the FF were is lowered to under 1%.

Is this correct? It sounds too fixed.
More...

Yes the 10-year note has a natural ceiling as people have no incentive to chase a yield lower than 3%.

Optionpro007 · Jan 29, 2008

Much obliged.

Cache Landing · Jan 30, 2008

Just to prove my point.

14:15 today TNX was at 3.7%

FED CUTS RATES 0.50%

TNX currently @ 3.75% and climbing with market.

Again, FF rate adjustment has NO SHORT TERM CORRELATION WITH TNX, and thus no correlation with mortgage rates.