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Mortgage Rates Fall as Bonds Rally: A Critical Housing Input

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Mortgage rates are a critical input to the housing market

Mortgage rates are the lifeblood of the housing market, and the Fed’s plan to help housing began with pushing rates lower in order to allow people to refinance. It also hoped that lowering mortgage rates would support home prices.

The government’s focus is now to draw first-time homebuyers into the market. The government has been announcing measures to increase credit availability for the first-time homebuyer. We’ll see if the changes actually affect buying patterns.

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Mortgage rates decrease as the ten-year bond reacts positively to the FOMC statement

Mortgage rates fell along with bond yields after the FOMC statement.

That said, we’ve seen tremendous volatility in the ten-year over the past month, so mortgage rates have tended to “fade” these moves. Last week, mortgage rates fell 6 basis points to 3.80% as the ten-year bond gave up 18 basis points in yield. This is another example of mortgage rates “fading” the ten-year.

Effect on mortgage REITs

Mortgage bankers like Nationstar (NSM) are in a position to perhaps wring out a good 2015 after a dismal 2014. Certainly the MBA mortgage banking indices indicate an improvement.

It looks like we have prepayment burnout at rates around these levels. It isn’t until rates hit the 3.8% level that prepays start kicking in. REITs that focus on agency MBS—like Annaly Capital (NLY) and American Capital Agency (AGNC)—will have to deal with the combination of lower rates and increased prepayment speeds if mortgage rates fall back towards the lows.

Investors interested in trading the mortgage REIT sector via an ETF should look at the iShares Mortgage Real Estate Fund (REM). Investors who are interested in making directional bets on interest rates should look at the iShares 20-year bond fund (TLT).

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