Interest rates rose Wednesday morning as Treasurys and mortgage-backed securities gave up some of their strong recent gains. The market changed directions at midday, and favorable repricing may occur this afternoon. In economic news, third quarter Productivity came in above forecast and Unit Labor Costs were revised lower. The Mortgage Bankers Association weekly purchase activity index rose by 38%, while the refinancing activity index increased by a whopping 203%, as average rates for the week fell by 1/2%.
Don, why are 15 yr rates so much higher than 30 yr rates? I thought it was normally the other way around.
Thank you for your question, and it’s a good one. The whole mortgage-backed securities (MBS) market is upside down right now. The best explanation I can provide is that investors are concerned about the extreme volatility and future direction of rates. The many government plans being considered to intervene in the market are upsetting the natural balance. As an example, if the Treasury continues purchasing MBS’s from Fannie Mae and Freddie Mac until rates hit 4.5% to 5.0% (as has been suggested), MBS’s issued at 5.5% will decrease greatly in value due to the strong likelihood of early payoff. 15-year loans are even more susceptible than 30-year loans, because the majority result from refinancing. These same borrowers will readily refinance again if the opportunity presents itself. While no one can predict the future direction of mortgage rates with any certainty, the increased “threat” of lower rates as a result of government intervention is wreaking havoc in the market. Look for things to settle down in the coming months, and for 15-year rates to resume their “normal” position below that of 30-year rates.