To Know Where Mortgage Rates Are Moving, Watch The Proper Indicators

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If you're a first-time reader, here's the first thing you get to learn at The Mortgage Reports:

Mortgage interest rates are determined by the price of mortgage bonds.  Nothing else, nothing more. 

If mortgage bond prices are down, mortgage rates will be higher.  If mortgage bond prices are up, mortgage rates will be lower.

That's it.  Pretty basic stuff.  Except that mortgage bond pricing information is not very accessible to the general public. 

This includes the press.

Because the mortgage-backed bond market is somewhat foreign to the media, a lot of them use a government bond called the "10-Year Treasury Note" when predicting where mortgage rates will go.  The 10-Year Treasury Note is very easy to follow because it's accessible -- just turn on CNBC or Bloomberg and you'll see it in the ticker.

And, usually, it's okay to use the 10-Year Treasury Note as a predictor of mortgage rates because the two tend to move in the same direction.  But there's no direct correlation between them.

It would be like saying that Microsoft will trade higher because Google beat its earning estimates.  Sometimes, Google will pull up the whole Technology sector, but there are plenty of days when it doesn't.

It's like dreaming about Gorgonzola cheese when it's clearly Brie time.

Unfortunately for mortgage rate shoppers, a lot of loan officers don't get the difference.  They, too, will use the 10-Year Treasury Note as a mortgage rate benchmark.  Again, most days it works, some days it doesn't.

Yesterday was one of those days.

At one point, mortgage rates were getting killed (down 19 basis points) while the 10-year treasuries were thriving (up 53 basis points).  Into the afternoon -- even as the 10-year treasury note extended its gain to 100 basis points -- mortgage bonds had barely recovered to flat.

If your eyes were on the wrong indicator, you would have expected mortgage rates to fall yesterday.  They didn't.  And this same divergence has occurred several times in August.

For people watching the wrong indicator, it may have led to costly rate lock errors.

The only security to watch with respect to mortgage rates each day is the price of mortgage-backed securities.  And if you didn't get the message this time, stick around and I'm sure I'll bring it up again sometime soon.