When the rate of 10 year Bonds goes down, mortgage rates will go down or up? How is it related? When bond rates at 10 years and crashes, not mortgage interest rates go up or down with the links?
Why is there a relationship and how it works? Please help you finance smart peeps out there! :)
Mortgage rates follow bond rates, but not always as fast and not necessarily.
a mortgage company do not take your payments and invest in bonds or oil or gold.
mortgage companies have to make a decision on where to place their money, and they do, you and your home. The interest rate on your mortgage is their rate of return for the money they have lent you. If we could get a higher rate of return by lending to the federal government, they would. They can not. They take a chance on you to take the individual borrower, and you charge more than the federal government (mortgage rates are higher than rates on government bonds, how much more depends on how you may repay them - which is supposed to be reflected in your credit score).
To get more money to lend to other banks or consumers many mortgage companies will package the loans with similar risk levels and sell them as bonds to another investor (usually a bank).
Now you can see why mortgage rates track bond!
No
Google this and you'll get better answers, and these are
Mortgage Co are invested in the bond market
They take your money from your mortgage payments and put
But at the moment and oil
Treasuries U.S. Govt, 10, 30, etc., are the benchmark rate of credit risk free. Think of it as the minimum cost "to borrow money. These rates rise and fall at a variety of factors - the overall health of the economy, the rate of inflation, or as a" safe haven "in times of crisis, to name a few.
Loans mortgage credit risk - the risk of default. It may depend on the creditworthiness of the borrower and the length of time they intend to borrow. So, to compensate a lender, they demand a risk premium (additional interest) on Treasury bonds would pay. This is called the spread.
Now the relationship is that there will always be a gap between Treasury bills and mortgages. Now this gap is not a fixed amount is determined by the market on a given day.
When the Treasury bond yield decline, mortgage rates tend to decrease in performance too, as the "risk-free rate (treasury bills) is now lower. However, because the credit spread is determined by other factors (by default, lending standards, etc.) mortgage yields could not get much (known as widening spreads) or they can drop more treasures ( known as the spread tightening.)
Two examples:
Before this year, the market does not see much credit risk. After all, with a housing market, if someone could not make their payments, they could sell their house and everyone get their money. So, therefore, the spread (yield difference) between Treasury bonds and mortgages has been tightening. Let's say the difference is 2 percent.
Treasury a year 10 = 5% = 7% Mortgage. As the mortgage spreads tighten:
Treasury a year 10 = 5%, 6.5% Mortgage =.
It spread tightening.
Look this year. In short, the housing market is soft, which means that if someone cannot make their payments and trying to sell their house, they could not get enough money to pay everyone back. This would result in default. Thus, the risk premium (spread) increases. In this case:
Treasury a year 10 = 5% = 7% Mortgage. As the mortgage spreads widen:
Treasury a year 10 = 5% = 7.5% Mortgage.
It is to broaden the spread.
So, put this: Treasures up and down according to their own reasons - the economy, inflation, mortgage rates, etc. use this benchmark, but add.
Posted on February 12, 2010.
