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After Thursday's data releases showed strength, mortgage rates are heading into the last trading day of 2006 up more than 0.375% on the week.  That's a lot for a normally sleepy week.  The broad shift in rates is a more a function of market liquidity than of economic fundamentals.

Tuesday's blowout New Home Sales figures were buoyed by Thursday's similarly strong Existing Home Sales figures.  In addition, Consumer Confidence registered its highest value since April, right before gas prices began their push towards $3.50 per gallon.

The third surprising number was a manufacturing index that rebounded from a three-year low to surprise markets by blowing out November estimates. 

In isolation, each of these reports has the power to shift mortgage rates.  But, all three released within hours of each other (as it was yesterday) can really make a difference in weeks like this.

With so many traders on vacation this week, there are fewer buyers and fewer sellers at any given price point for mortgage bonds.  Therefore, it is much less likely that a person who wants to buy at a certain price will find somebody who wants to sell at a certain price. 

This is the concept of liquidity and it's easier to understand in the context of eBay.  The more people that use eBay, the more valuable it is for everyone that uses it because there is a much greater chance that there will be a buyer for every item listed at every given price.  Both the buyers and sellers benefits. 

With an already-fragile market psyche, the market's lack of liquidity because of vacationing traders is causing what looks like an over-reaction to economic news, but is really just market forces at work.  There just aren't as many sellers willing to sell at the given prices that buyers want to pay.

This forces prices for mortgage bonds move wildly and is the reason why rates have moved so much this week.

Markets are closing today at 1:00 P.M. EST which means that even fewer traders will show up at the office.  Expect continued volatility.

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.