What the stock market rally means to rates
March 27, 2009 by admin
The month of March has been a great month for stock investors. The market has jumped over twenty percent this month, and the NASDAQ has now recouped all of it’s losses for the year. The market appears to have rallied off of the March 9 low following a lead from better than expected news from new and existing home sales, a radical move by the FOMC and the general psyche of the average investor.
The rapid increase in the stock market could begin to pressure fixed interest rates and mortgage rates to move higher. Last week, Freddie Mac, one of the countries largest agency lenders reported that fixed mortgage rates on thirty year loan terms had dropped to their lowest level in recorded history (4.88%). This rapid decline has led to a spike with home refinance applications, as reported by the mortgage bankers association. The rapid jump with refinance applications could be impacted by the recent moves in the stock market. Historically, as the stock market improves, mortgage rates tend to rise. This is a direct reflection of investors pulling money out of the bond market, and investing this into equity postions.
The average consumer can follow this by tracking both the stock market and the ten year bond. While this is not always the best reflection of how a mortgage loan is priced, it is generally the easiest to follow. The day after the FOMC announced that they would be purchasing and additional five hundred billion dollars worth of mortgage bonds, the yield on the ten year bond dropped down to 2.65%. The yield on the ten year bond opened at 2.73% on Friday, and has been over 2.8% this week. The rise in the yield, most likely indicates that fixed rate mortgage loans have moved up roughly .25%. This is not a dramatic move, but the markets are very much in a state of uncertainty and their is potential for large swings in both the equity and bond markets, which could adjust interest rates quickly.
The stock market is likely to remain in unchartered territory for the next few months as investors continue to digest the latest economic news and corporate earnings. The moves by the FOMC should help to keep mortgage rates at low levels for the balance of 2009. Their is no guarantee that home owners will be able to lock in rates under five percent, but it is hard to imagine rates moving beyond the six percent range in the near future. The low rates are good for both existing home owners who can refinance and free up disposable cash to invest back into the economy and new home buyers who can help reduce the existing home inventory levels, both of which will be critical to helping the economy rebound and both of which are important to the FOMC and will help to shape future policy.