Bankrate.com Mortgage Trend Index (October 30, 2008)

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I am a regular participant in the Bankrate.com Mortgage Rate Trend survey and this week's survey is now available.

As a reminder:

1. The survey is for conforming mortgages only.
2. Send me an email for an actual rate quote.
3. I send 140-character market updates on Twitter a few times daily.

Anyway, on to the group's predictions for the next 30 days:

• 46% of participants predict rates will increase
• 38% of participants predict rates will decrease
• 16% of participants predict rates will remain unchanged

I am predicting that rates will increase over the next 30 days, but that doesn't mean you should necessarily follow my advice when choosing whether to lock a rate, or float it.  My advice may not be appropriate for your individual situation.

From the Bankrate.com survey:

"Mortgage bonds are now Flyover Country for investors -- stocks are on one coast and treasury bills on the other.  Lack of demand pushes rate up."

It's been an all-or-nothing-like market lately.  Investors either clamor for risk in the stock markets, or seek safety in government treasuries.  The result is that the "middle ground" product -- mortgage-backed securities -- is getting largely ignored.

It's an irrational pattern to the casual observer so let's break it down a bit.

The going argument is that when the government nationalized Fannie Mae and Freddie Mac, it effectively explicitly converted their mortgage-backed debt into treasury-bill equivalents.  Therefore, mortgage rates should benefit from flights to safety.  That's a fair analysis.

But what doesn't get accounted for in that argument is the value of being liquid. 

U.S. government bonds are among the most liquid investments available in the world.  When investors, hedge funds and central banks need cash right this second, they know that the fastest way to get it is by selling U.S. treasuries. 

Mortgage-backed bonds, by contrast, are not so liquid.

So, in this current market which values liquidity above all else because -- let's face it --  you never know when the junk is going to hit the fan, guvvie bonds trump the mortgage-backed kind.  When investors seek safety, they want products with as high a cash equivalency as possible. 

U.S. treasuries fit the bill -- mortgage bonds do not.

To know what's happening in mortgage market now, get near-real time market updates from me @mortgagereports on Twitter.