Great question. Remember that out in the market, whether you’re talking oil prices or mortgage rates, the relationship between the major indicators (say a barrel of oil) and the commodity itself (that gallon of gas) is often indirect.
Such is the case with mortgage rates. As one of the many types of debt available to investors, mortgages are affected by the bond and treasury markets, but carry only an indirect relationship to them. As money moves in and out of the treasury markets for instance (investors chase profit in many different venues), the price of debt is driven up or down by demand (or lack thereof).
In recent years, the real estate boom created a new market for debt — the mortgage backed security (MBS), or mortgage bond. In this process, investment banks take individual mortgages and bundle them together with thousands of others into a huge investment package ‘ a fund. The fund is then assigned a value (usually in the hundreds of millions) based on its secured assets (homes), income potential (incoming mortgage payments) and level of risk (debt rating). This newly 'collateralized’ debt is then used to generate institutional investment from private and government entities in the U.S. and globally.
As there is no central exchange (like Wall Street or the CBT) for the mortgage securities (someday?), there is no true index for the MBS. Individual participation has generally been limited to access via retirement and mutual funds and other portfolio investments.
Now generally speaking, a few good days on the bond market (with say, falling yields on the benchmark 10-Year bond) do tend to produce rate improvements in the mortgage markets, the relationship is definitely not 1:1. The recent credit crisis has been a notable exception. As billions of dollars exited the stock market in Aug 2007, bond demand shot up and yields moved downward (higher demand = smaller discounts). Scared of (and rightfully so) by months of subprime mortgage losses, however, investors stayed clear of mortgage debt, and mortgage took off for the heavens. Days later, even as the Fed poured billions more into the parched money markets and bond rates responded, investors avoided MBS like the PLAGUE, causing mortgage rates to rise 1, 2 and even 3-points on some markets in search of investment.
Anyone counting on the 10-year right now produce a mortgage forecast is probably going crazy. So just where IS the mortgage rate pulse best taken? Look to the secondary markets ‘ specifically government corporations like Fannie Mae (FNME), Freddie Mac (FHLMC) and Ginnie Mae (GNME).
With mortgage investors mostly out of the picture for now, demand for mortgage debt pricing will be driven primarily by the appetites of of these three giants.