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Forget about that 4.500 percent, 0-point mortgage rate you passed on last month.  It's gone.  Today, conforming mortgage rates are bearing down on 6 percent.

For a homeowner in Cincinnati with a $300,000, fixed-rate home loan, the impact is huge.  Since the unofficial start of summer, rising mortgage rates have added $240 to a monthly mortgage payment.

There are two reasons why rates are rising -- one fundamental, and one superstition-like.  We can't ignore either.

The fundamental reason rates are rising is evidence is emerging that shows the global economy in recovery.  There's bound to be setbacks from month-to-month, but overall, the foundation for economic growth appears to be in place. 

Unfortunately for active home buyers and shoulda-woulda-coulda refinancers in Cincinnati and everywhere else, the recovery is coming faster and with more force than was expected.  The pace of the recovery is forcing traders to account for longer-term inflation and inflation just kills mortgage rates.

The superstition reason is important, too.  It's about heeding trends and patterns -- something Wall Street players call Technical Analysis.  It's not super-important that you get how Technical Analysis works, you just need to know the basic premise behind it.

Technical Analysis is a pseudo-science; a way of studying markets that says patterns repeat themselves over time. Ironically, in a blatant case of Self-Fulfilling Prophecy, because traders believe in pattern watching, they often cause the pattern to be fulfilled. 

This is why mortgage rates sometimes dip and soar for no apparent reason -- their strings are getting pulled by technical traders.  And, part of what's driving rates up right now should eventually drop them back down.  Maybe not to 4.500 percent, but somewhere close, perhaps.

If you've missed the bottom in rates, there's still hope:

• Technical trading patterns should eventually draw rates back down
• The Federal Reserve will likely accelerate its commitment to low rates
• Mortgage rates tend to be seasonal and cyclical

Make sure you don't miss the next rate drop.  It will happen -- we just don't know when. 

Of course, you have a day job and have probably spent more time researching rates than you want to already.  two terrific ways to get your mortgage rate news are to:

1. Follow me on Twitter at http://twitter.com/mortgagereports
2. Get this blog delivered by email each day

Rates move too fast to rely on slow-to-break stories on TV or in the papers.  You'll want mortgage rate news in real-time and you'll want my advice on whether to lock a rate or wait it out for something "better", too.  Reach out to me  and I'll put you on my mortgage rate "watch list".

I just finished up a call with a client in which we discussed the current state of mortgage markets and why mortgage rates have risen so far, so quickly.

30-year fixed mortgage rates are up as much as 0.625% over 30 days.  That's ridiculous given the relatively low volatility of mortgage rates since last August.

Unfortunately, most folks have no context or perspective of the mortgage markets so the job gets left to people like me to help put market changes into plain English terms.

I just explained it to my client like this:

Mortgage bonds are the Cubs and global investors are the Cubs GM Jim Hendry realizing that the Cubs won't make the World Series.

He understood me perfectly.  Here's how it goes. 

The Cubs organization invested millions of dollars in the team during the off-season, signing Soriano ($17 million), Ramirez ($15 million), DeRosa ($4.3 million) and others. 

The hope was that the investment in players will bring a championship.

Expectations were high for the Cubs but those expectations are not translating into on-field performance.  After all, it's mid-June and the Cubs are sitting 6 games out of first with a .448 winning percentage.

So, Cubs GM Jim Hendry faces a familiar problem.  Fish, or cut bait?

Clearly the Cubs don't have the pieces to win a World Series without making a trade (or several of them), so Hendry's choices are:

1. Double down on the off-season bets by trading Cubs prospects for "now" players
2. Or, abandon the off-season plan by trading expensive players in exchange for prospects and a new plan for the future

Did you see the talk of Carlos Zambrano getting shipped to greener pastures?  This is where my client had his Eureka! moment.

Bond markets are facing the exact same problem as the Cubs management.

See, for the past 9-12 months, bond markets were planning for a fantastic "season" in the U.S. economy.  They loaded up on product and hoped for fantastic returns.

Flash forward into Q2 and with each passing news release and with each different Fed speaker taking the podium, it's becoming apparent that the market's collective assumption was wrong.

For a long while, traders held on hope that the economy would pull it out, validating their investment.  It's only now that they realize how they miscalculated.  And nobody wants to be the last one holding their "stars".

Traders are unloading their portfolio in order to protect their future cash flows.   Much like the Cubs will do soon with Zambrano.

In one of my favorite posts ever, I wrote about the time Chicago Fed President Michael Moskow addressed the topic of inflation with a room of Chicago businesspeople.

Paraphrasing, Moskow made the following points:

1. There is a direct link between the expectation of inflation and actual inflation
2. Because they prepare for inflation, businesses actually make inflation happen
3. One function of the FOMC is to manage business' expectation of inflation

Summarized: Inflation is a self-fulfilling prophecy and the FOMC uses its words and the Fed Funds Rate to fight predictions. 

Stated differently: The FOMC responds to market psychology as well as data. 

That's a strange and frightening thought.  Economists are not psychiatrists.  We alluded to this game last September in a post titled "Did the Fed fake out the markets in an attempt to slow down the economy?" and the concept has not warmed on us one bit.

Today, the FOMC begins their two-day affair and you can be sure that managing business' prevailing inflation anxiety is high on the meeting agenda. 

In their last post-meeting press releases, the FOMC stated that housing weakness should drag down growth by about a full percent.  Yet, housing has shown resiliency and has some pundits even calling for a <gasp!> rebound. 

If housing bounces back, businesses know that the "1% drag" on growth will never happen and that puts inflation back in play.  Back to the self-fulfilling prophecy bit: this is a major contributor to the huge run-up in mortgage rates lately; markets are preparing for inflation.

Tomorrow afternoon, the FOMC will issue a press release summarizing its meeting.  The questions remains, though: Will the press release be issued from behind the desk, or from the fluffy couch?

Today's Non-Farm Payrolls report damaged more than ADP's economic forecasting reputation -- it also damaged the market's hope that Fed will lower the Fed Funds Rate by May.

Prior to this morning's release, the Fed Fund Futures reflected a 53% chance that the FFR would drop from its current 5.250% level at or before the May FOMC meeting.  According to David Gaffen of the Wall Street Journal, the probability is now 34%. This expectation change will pressure mortgage rates higher. 

Why?  Because job creation is one signal of an expanding economy and this will force the FOMC to change course -- it had been planning for a gradual slowdown in 2007.

The Non-Farm Payrolls report offer key clues to the overall growth of the US economy and the logic works like this:

1. Growing companies hire new workers that were previously unemployed
2. New workers earn money that they didn't earn while unemployed
3. Money gets spent and put back into the economy
4. Companies continue to grow to meet the growing demands of consumers/workers

In addition, wages generally move higher in an expanding economy as companies try to keep their employees and we saw evidence of that in December as well; today's release showed a 0.5% increase in hourly earnings versus an expectation of 0.3%.

Once more, more money is earned and, therefore, more money is spent, propelling the economy forward.

Whereas last month markets were waiting for the other shoe to drop on the economy, they are now bullish on growth.  That does not bode well for people who have shopping for homes, or have not yet locked their mortgage rates in advance of a planned closing.

(Image source: ekkyp)

Mortgage rates are sitting higher than their December lows, and will become more and more volatile as the year comes to a close.

This is Holiday Season and more and more traders will be taking leave with each passing day.  This removes liquidity from the market because there are fewer buyers to match with sellers, and fewer sellers to match with buyers.

With fewer traders, 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.  Therefore, mortgage bonds (and interest rates) may move a lot more sharply than we're used to seeing.

Not helping matters: this is a big week for economic data with PPI, GDP and a host of others.  But Friday is the biggest day.

On Friday, the government will release the Personal Consumption Expenditures Index, the Fed's self-professed favorite measure of inflation.  This is a Market Mover, but there will be far fewer market players come Friday morning -- many people will have already left for the weekend.  Myself included.

Just how much impact did last week's economic reports have on economic opinion?

On Monday, markets expected with 24% probability that the Fed would lower the Fed Funds Rate in January.

By Friday, that decreased to 8%.

Considering that many mortgage rate locks are honored for 30 days, it should be pretty apparent why rates spiked last week.  When those 30 days are up, it is far less likely that the economy will be showing signs of a slowdown.

The likelihood of a decrease at March's FOMC meeting was pretty dramatic, too.  The expectation of a FFR rate decrease moved from 55% to 25%.

Remember, though: The Fed Funds Rate does not directly impact mortgage rates.  Why the FFR matters to mortgage markets is the same reason why it matters to everyone else.  Increases in the FFR are in response to inflation; decreases are in response to recession.  The FFR is the Fed's signal to global markets about our economy's health.

This morning -- in the middle of prepared remarks made at Maggiano's Little Italy -- Chicago Federal Reserve Bank President Michael Moskow said that the Fed pays close attention to the inflation expectations of markets. 

There is a direct link between the expectation of inflation and actual inflation, he told the crowd.

When business feels threaten by inflation, it changes its plan of attack to minimize inflation's impact on profits. 

In doing so, Moskow said, inflation can become a self-fulfilling prophecy.

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