MBS Effect on Mortgage Rates – Mortgage News Daily

May 5, 2022 By admin

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We just said that investors are paying 102% of the face value of a bond in certain cases right? So what happens if they are not interested at that price any more? No more liquidity for the mortgage market. So how do you combat this? In a nutshell, the market forces of supply and demand take care of it. If demand for a bond is low when the price is 102.00, then the sellers of the bonds may lower the price to 101.50 to ENTICE investors to start buying again. And what did we already say would happen to the YIELD when the price got lower for a particular issue? It goes UP because the same money the investor was going to spend, now buys more shares. So their rate of return per dollar spent (yield) goes up.
Those pricing adjustments from 102.00 to 101.50 should look familiar. They move in exactly the same proportion to YSP. Although Big Bank A has to pull profit off that for themselves, THE PRICES OF MBS ALWAYS MOVE IN DIRECT PROPORTION TO THE PRICES (YSP IF POSITIVE, DISCOUNT IF NEGATIVE) OF THE MORTGAGES FROM WHICH THEY ARE DERIVED.
That is why we want to follow MBS instead of any other treasury or index in order to gauge the direction of the market. If investors are wanting to buy more MBS, then the prices are going to go up (Price vs. Demand function). Higher prices mean that Big Bank A makes more on a given coupon, which means they can originate a loan for your clients with either a slightly lower interest rate or a slightly higher YSP. Your choice!
So that is the theme of any mortgage market analysis. We want to assess the movements of MBS prices (which change by the second), in conjunction with the macroeconomic climate, in order to determine which way they might be headed and what future events can have an impact.
For instance, inflation data being negative hurts bonds because bonds return a fixed income. So if inflation has devalued the dollar over time, the bond is not really worth as much as when it first was purchased. So high inflation makes investors seek higher yields in order to get on that boat. Another popular correlation is that a booming economy draws money out of bonds and into more rapidly appreciating stocks. This causes bond owners to lower the price to entice buyers which raises mortgage rates. That is why, if you look at a historical chart of recessions and interest rates, you will almost always see recessions coincide with low rates.
Beyond that, there's only a little more you need to know when reading my analysis.
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