Mortgage Rates Tick Up Slightly despite a Bond Rally

Mortgage rates are a critical input to the housing market

Mortgage rates are the lifeblood of the housing market. The Fed’s plan to help housing began when it pushed rates lower to allow people to refinance. The central bank also hoped that lowering mortgage rates would support home prices.

Mortgage Rates Tick Up Slightly despite a Bond Rally

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

Mortgage rates tick up despite a bond market rally

Mortgage rates have tended to fade the big moves in the bond market lately. When rates dip well below 1.9% on the ten-year bond, mortgage rates move lower, although very reluctantly. When rates increase to 2.3%, mortgage rates have tended to move up only grudgingly. Last week, the ten-year bond yield decreased 2 basis points and mortgage rates increased by 1 basis point to 4.09%.

As a general rule, mortgage rates are somewhat stabler than bond yields. When we see big outsized moves in bond markets, mortgage rates tend to lag the move. Investors interested in making directional bets on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT).

Effect on mortgage REITs

Mortgage bankers like Nationstar Mortgage Holdings (NSM) are in a position to perhaps wring out a good 2015 after a dismal 2014. Certainly, the MBA (Mortgage Bankers Association) indices suggest an improvement.

If mortgage rates continue to fall, you should start seeing prepayments accelerate. Lately, it’s not until rates hit 3.8% that prepays start kicking in. REITs that focus on agency mortgage-backed securities, including MFA Financial (MFA) and American Capital Agency (AGNC), will have to deal with the combination of lower rates and increased prepayment speeds if mortgage rates fall back toward their lows.

Investors interested in trading in the mortgage REIT sector through an ETF should look at the iShares Mortgage Real Estate Capped ETF (REM).