How the stock market impacts mortgage rates
Although inflation expectations are the primary factor that influence the direction of mortgage rates on a day-to-day basis the stock market can also have an impact.
To understand how this relationship works it’s first important to understand how mortgage rates are determined. Mortgage rates are entirely determined by the price of mortgage-backed bonds (MBS’s). MBS’s are bonds that are issued by Fannie Mae & Freddie Mac that are backed by the interest paid by mortgage holders. Like the stock market there is an exchange where MBS’s are traded.
There is an inverse relationship between the price of MBS’s and mortgage rates. When the price of MBS’s increase mortgage rates drop and vice versa.
So, to understand how the stock market can influence mortgage rates we have to understand how they impact the price of bonds. Stocks and bonds compete for the same investment dollar. In other words, an investor with money to invest has to make a decision to invest their money in either the stock market or in the bond market (it should be noted that there are other investment options but these two classes are the primary vehicles for investment capital).
For an investor stocks are generally thought to provide higher returns over time but also come with greater volatility. Conversely, bonds tend to have lower returns over time but have less volatility. Because bonds tend to provide low volatility with modest returns the bond market can often act as a “safe-haven” for investors who sell their stock positions.
Therefore, in general, when the stock market goes down it is a sign that investors are selling stocks and shifting their capital into bonds. This boosts bond prices and drives mortgage rates down. Conversely, when the stock market rallies it is a sign that investors are selling bond positions in order to shift capital into the stock market. The greater supply of bonds on the market drives prices lower and pushes mortgage rates higher.
It’s important to understand that there are a myriad of factors that impact mortgage rates on a day-to-day basis. Inflation expectations & technical trading patterns are two of the primary factors that we monitor. However, in the absence of new information on these two topics it’s not uncommon for mortgage rates to be impacted by the stock market in the aforementioned manner.
Posted: May 9th, 2008 under Economics & Interest Rates, General Mortgage Info., Rate Update.
Tags: interest rates, mortgage rates, stock market
Comments
Pingback from Mortgage Rate Update » Rate Update for 08-08-08
Time August 8, 2008 at 8:22 am
[...] Jones Industrial Average is currently trading higher by 170 points. We know that often times the stock market and bond market can trade inversely which could put pressure on mortgage rates to move [...]
Pingback from Mortgage Rate Update » Rate Update for August 13, 2008
Time August 13, 2008 at 8:03 am
[...] Much of the credit for lower mortgage rates can be credited towards a weak stock market. Yesterday the markets dropped approximately 1% on renewed credit fears and today the Dow Jones Industrial Average is off by over 150 points thanks to a weak retail sales report. For an explanation on how a weak stock market can help lower mortgage rates read this link. [...]
Pingback from Mortgage Rate Update » Rate Update for August 25, 2008
Time August 25, 2008 at 8:03 am
[...] Mortgage rates are modestly lower today as mortgage-backed bonds trade inversely with the stock market. [...]
Pingback from My Mind on Mortgages » Rate Update October 1, 2008
Time October 1, 2008 at 7:34 am
[...] Mortgage rates are modestly higher this morning in response to yesterday’s rally in the stock market (click here to learn how stocks can impact mortgage rates). [...]
Pingback from My Mind on Mortgages » Rate Update October 6, 2008
Time October 6, 2008 at 7:09 am
[...] Around the world investors are concerned that the ongoing credit crisis will cause the global economy to enter into a recession. The problems stemming from the US credit crunch have been exported overseas. In fact, Germany announced over the weekend that the government had orchestrated an effective bailout of one of the nation’s largest lenders. When stocks perform poorly it’s common to see mortgage rates drop. [...]
Pingback from My Mind on Mortgages » Rate Update October 15, 2008
Time October 15, 2008 at 7:54 am
[...] has not played a significant role over the past few weeks. Our secondary focus tends to be on the inverse relationship between stocks and bonds. However, this correlation has not held true either over the previous few [...]
Pingback from My Mind on Mortgages » Rate Update October 17, 2008
Time October 17, 2008 at 8:26 am
[...] this news stocks are trading lower which is helping to support mortgage-backed bond prices. For now we’ll continue to float in the hopes that rates will continue to move lower. [...]
Pingback from My Mind on Mortgages » Why margin calls are currently causing mortgage rates to rise
Time October 24, 2008 at 7:41 am
[...] a more normal financial environment we expect that when stocks trade lower mortgage rates benefit. This is because when money flows out of stocks it typically finds its way into the bond market [...]
Pingback from My Mind on Mortgages » Rate Update November 12, 2008
Time November 13, 2008 at 8:31 am
[...] Stocks are weaker due to concerns about consumer spending in the US economy. As we’ve pointed out many times in the past here on rate update, it is often the case that when stocks trade lower mortgage rates benefit. [...]
Pingback from My Mind on Mortgages » Rate Update November 14, 2008
Time November 14, 2008 at 8:43 am
[...] morning stocks are trading lower, which helps mortgage rates, on weak retail sales [...]
Pingback from My Mind on Mortgages » Rate Update November 24, 2008
Time November 24, 2008 at 7:56 am
[...] Good news for stocks is often bad news for mortgage rates so we’ll have to see if mortgage rates can hold their ground. [...]
Pingback from My Mind on Mortgages » Rate Update December 2, 2008
Time December 2, 2008 at 8:35 am
[...] In the absence of any economic data mortgage rates will likely respond to the stock market. As we’ve pointed out many times in ‘rate update’, when the stock market rallies it often pushes rates higher. [...]
Pingback from My Mind on Mortgages » Rate Update December 8, 2008
Time December 8, 2008 at 8:48 am
[...] There are no economic reports scheduled for today so it is likely that Mortgage Bonds will react to the Stock Market. Please refer to this blog posting to see how. [...]
Pingback from My Mind on Mortgages » Rate Update December 30, 2008
Time December 30, 2008 at 8:12 am
[...] trading which is taking away from the lift we saw yesterday morning in the bond market. Read this blog entry to find out why the stock market is pulling money away from [...]
Pingback from My Mind on Mortgages » Rate Update July 7, 2009
Time July 7, 2009 at 7:55 am
[...] we’ll need to keep a close eye on the stock market for clues on how mortgage rates will move (click this link to understand how stocks impact mortgage rates). Although different analysts have different opinions it seems as though the financial sector [...]
Pingback from My Mind on Mortgages » Rate Update July 9, 2009
Time July 9, 2009 at 7:41 am
[...] the course of the next couple weeks mortgage rates will likely take lead from the stock market. Click this link to read how the stock market impacts mortgage [...]
Pingback from My Mind on Mortgages » Rate Update July 13, 2009
Time July 13, 2009 at 7:28 am
[...] Mortgage rates remain unchanged from Friday. With the lack of any significant economic data out today we expect mortgage rates to take direction from the stock market. [...]
Pingback from My Mind on Mortgages » Rate Update July 17, 2009
Time July 17, 2009 at 7:03 am
[...] rates opened up level with yesterday but appear poised to move higher this afternoon in response to a small rally in the stock market. Signs of economic stabilization have helped stocks move into positive [...]
Pingback from My Mind on Mortgages » Rate Update August 13, 2009
Time August 13, 2009 at 6:19 am
[...] weekly jobless claims were reported higher than expected. Both reports are weighing on the stock market which has helped mortgage rates recover ground from [...]
Pingback from My Mind on Mortgages » Rate Update August 17, 2009
Time August 17, 2009 at 7:07 am
[...] benefiting from a global “flight-to-quality” as stock markets tumble around the globe (click this link to learn how stocks impact mortgage rates). Investor sentiment around the world has taken a more [...]
Pingback from My Mind on Mortgages » Rate Update August 19, 2009
Time August 19, 2009 at 6:48 am
[...] then you know that mortgage-backed bond prices (MBS) often trade inversely with stocks (if not, click this link); especially in the absence of other economic [...]
Pingback from My Mind on Mortgages » Rate Update September 2, 2009
Time September 2, 2009 at 7:09 am
[...] prices have benefited from a weak stock market (click here to understand why). The Dow Jones Industrial Average is off by almost 250 points since Monday. Historically [...]
Pingback from My Mind on Mortgages » Rate Update September 29, 2009
Time September 29, 2009 at 6:49 am
[...] sensitive data there is not much to look at this morning. We expect mortgage rates to take direction from stocks which are currently trading [...]
Pingback from My Mind on Mortgages » Rate Update September 30, 2009
Time September 30, 2009 at 6:32 am
[...] MBS’s are benefiting from a weaker stock market. The Dow Jones Industrial Average is currently off 115 points in [...]
Pingback from My Mind on Mortgages » Rate Update October 13, 2009
Time October 13, 2009 at 6:52 am
[...] 3rd-quarter earnings season when public corporations disclose their 3rd-quarter results. You can read here why this can impact mortgage rates. This morning stocks are lower after Johnson & Johnson [...]
Pingback from My Mind on Mortgages » Rate Update October 14, 2009
Time October 14, 2009 at 6:53 am
[...] bonds (MBSs) started the day lower in response to higher stock prices. Stocks are rallying on better than expected earnings reports from Intel [...]
Pingback from My Mind on Mortgages » Rate Update October 19, 2009
Time October 19, 2009 at 6:47 am
[...] 3rd quarter earnings season rolls on this week. Last week 61 companies in the S & P 500 reported and 79% of those beat estimates. Not by coincidence mortgage rates also moved higher last week. 130 companies are scheduled to report this week. If their earnings are healthy as well we will likely see rates pressured higher and vice versa. [...]
Pingback from My Mind on Mortgages » Rate Update November 2, 2009
Time November 2, 2009 at 7:53 am
[...] activity (both domestically and in China), construction spending, and existing home sales. Good news for the economy is typically bad news for mortgage [...]
Pingback from My Mind on Mortgages » Rate Update November 9, 2009
Time November 9, 2009 at 7:47 am
[...] all asset classes are trading higher. Here on ‘rate update’ we often talk about the inverse relationship between stocks and bonds. Typically when stocks are higher it is driving the price of [...]
Pingback from My Mind on Mortgages » Rate Update January 11, 2010
Time January 11, 2010 at 7:19 am
[...] opinions regarding the outlook for the US economy I expect these reports to cause some volatility (click this link to understand how the stock market impacts mortgage [...]
Pingback from My Mind on Mortgages » Rate Update January 21, 2010
Time January 21, 2010 at 7:00 am
[...] better than expected earnings the financial sector is leading the stock market lower which is helping mortgage rates remain [...]
Pingback from My Mind on Mortgages » Rate Update January 29, 2010
Time January 29, 2010 at 7:08 am
[...] morning stocks are rallying putting upward pressure on mortgage rates. The Commerce Department released the latest GDP report which showed that the [...]
Pingback from My Mind on Mortgages » Rate Update February 1, 2010
Time February 1, 2010 at 7:24 am
[...] equity markets are trading higher across the board this morning which is putting pressure on mortgage rates. Stocks are reacting to a better than expected manufacturing report which [...]
Pingback from My Mind on Mortgages » Rate Update February 23, 2010
Time February 23, 2010 at 7:07 am
[...] in early trading in response to weaker equity markets across the globe. Stocks and bonds often trade inversely with each other which is what is happening [...]
Pingback from My Mind on Mortgages » Rate Update March 10, 2010
Time March 10, 2010 at 8:45 am
[...] rates are being pressured higher this morning in response to a higher open for stocks. Stocks and bonds compete for the same investment dollar so when the equity markets rally it is often at the expense [...]
Pingback from My Mind on Mortgages » Rate Update April 9, 2010
Time April 9, 2010 at 7:44 am
[...] With a lack of economic data out today I expect mortgage rates to react to technical trading patterns and the stock market. [...]
Pingback from My Mind on Mortgages » Rate Update April 12, 2010
Time April 12, 2010 at 8:20 am
[...] also provide guidance for the remainder of the year. If these reports are surprisingly healthy mortgage rates are likely to suffer and vice [...]
Pingback from My Mind on Mortgages » Rate Update April 19, 2010
Time April 19, 2010 at 7:44 am
[...] Today regulators are digging into the books of other large Wall Street institutions to see if wrong-doing was wide-spread. Should further problems be found I’d expect further selling in the stock market. When stocks suffer mortgage rates often benefit. [...]
Pingback from My Mind on Mortgages » Rate Update May 12, 2010
Time May 12, 2010 at 7:54 am
[...] this news stocks are trading higher and bonds are trading lower which threatens to push mortgage rates higher. Gold prices-past 12 [...]
Pingback from My Mind on Mortgages » Rate Update May 24, 2010
Time May 24, 2010 at 7:54 am
[...] emergency move has spooked investors. Both US and European stock markets are lower which should help interest rates remain [...]
Pingback from My Mind on Mortgages » Rate Update May 26, 2010
Time May 26, 2010 at 8:00 am
[...] In addition, new home sales also came in higher than expected. Good news for the economy is often bad news for mortgage rates and we’re seeing that [...]
Pingback from My Mind on Mortgages » Rate Update June 10, 2010
Time June 10, 2010 at 7:51 am
[...] market which is the key to an economic recovery. On that news stocks are trading higher which could pressure mortgage rates higher later [...]
Pingback from My Mind on Mortgages » Rate Update June 23, 2010
Time June 23, 2010 at 7:49 am
[...] The Commerce Department reported earlier this morning that new home sales collapsed in May. Analysts were expecting a 20% decline in new home sales but they actually fell by 33%. The decline shouldn’t be a huge surprise given the expiration of the home buyer tax credit but the markets are acting like this number came out of nowhere. Stocks are lower which is helping mortgage rates. [...]
Pingback from My Mind on Mortgages » Rate Update July 6, 2010
Time July 6, 2010 at 8:03 am
[...] Many analysts believe that stocks are oversold and bonds are overbought which means we may see mortgage rates rise in the [...]
Pingback from My Mind on Mortgages » Rate Update July 7, 2010
Time July 7, 2010 at 8:36 am
[...] positive outlook provided by State Street Bank. Typically a rally in the stock market would cause mortgage rates to move higher but clearly there is a dichotomy in the market. One school of thought forecasts a rosier outlook [...]
Pingback from My Mind on Mortgages » Rate Update July 15, 2010
Time July 15, 2010 at 7:52 am
[...] The bulk of the economic data is interest rate friendly. Thus far stocks are trading lower on this news which is helping mortgage rates. [...]
Pingback from My Mind on Mortgages » Rate Update July 22, 2010
Time July 22, 2010 at 8:00 am
[...] better than expected earnings from Caterpillar, 3M, and AT&T. When stocks rally it often puts upward pressure on mortgage [...]
Pingback from My Mind on Mortgages » Rate Update July 28, 2010
Time July 28, 2010 at 7:55 am
[...] for June when the markets were expecting a small increase. Bad news for the economy is often good news for mortgage [...]
Pingback from My Mind on Mortgages » Rate Update July 30, 2010
Time July 30, 2010 at 7:08 am
[...] have opened lower on weak economic and earnings data, which should help mortgage rates. The Commerce Department reported this morning that 2nd quarter GDP growth was more sluggish than [...]
Pingback from My Mind on Mortgages » Rate Update August 2, 2010
Time August 2, 2010 at 8:19 am
[...] morning stocks are trading higher which is damaging the interest rate markets. Stocks are trading higher on better-than-expected construction [...]
Pingback from My Mind on Mortgages » Rate Update August 11, 2010
Time August 11, 2010 at 7:39 am
[...] have opened the day sharply lower which is helping interest rates to move lower. The move comes on the heels of the weak economic data and the Fed policy statement [...]
Pingback from My Mind on Mortgages » Rate Update August 19, 2010
Time August 19, 2010 at 7:41 am
[...] prices are benefiting from worse than expected economic data which is weighing on [...]
Pingback from My Mind on Mortgages » Rate Update August 20, 2010
Time August 20, 2010 at 8:21 am
[...] on comments out of Europe which have soured the global economic outlook. Ordinarily this would help mortgage rates but mortgage-backed bonds (MBS’s) are currently trading [...]
Pingback from My Mind on Mortgages » Rate Update August 24, 2010
Time August 24, 2010 at 7:43 am
[...] are trading lower, helping mortgage rates, on weak existing homes sales for July. The National Association of Realtors reported this [...]
Pingback from My Mind on Mortgages » Rate Update September 1, 2010
Time September 1, 2010 at 7:38 am
[...] Despite worse than expected employment and construction spending data stocks are trading sharply higher while bonds are trading lower, pushing yields up. [...]
Pingback from My Mind on Mortgages » Rate Update September 7, 2010
Time September 7, 2010 at 7:55 am
[...] most of our attention will be focused on the stock market and technical trading patters (Click HERE and HEREHERE to understand how they can impact mortgage [...]
Pingback from My Mind on Mortgages » Rate Update September 9, 2010
Time September 9, 2010 at 7:43 am
[...] from last week raising optimism about the economic recovery. Good news for the economy is often bad news for mortgage [...]
Pingback from My Mind on Mortgages » Rate Update September 13, 2010
Time September 13, 2010 at 7:02 am
[...] of these headlines are good news for stocks and bad news for mortgage rates. Mortgage-backed bond prices have now slipped below important layers of technical support. I am [...]
Pingback from My Mind on Mortgages » Rate Update September 20, 2010
Time September 20, 2010 at 7:51 am
[...] will have to be the housing market to lead us out. Better than expected housing data would likely boost stocks and hurt mortgage rates and vice [...]
Pingback from My Mind on Mortgages » Rate Update September 21, 2010
Time September 21, 2010 at 7:55 am
[...] is being credited to multi-family construction. Typically better-than-expected economic data is good for stocks and bad for rates but the markets are not reacting thus [...]
Pingback from My Mind on Mortgages » Rate Update September 24, 2010
Time September 24, 2010 at 7:46 am
[...] stocks trade higher it is often not a good sign for mortgage rates and today mortgage-backed bonds are trading lower; pushing yields [...]
Pingback from My Mind on Mortgages » Rate Update October 1, 2010
Time October 1, 2010 at 8:18 am
[...] It’s a busy morning for economic news. Earlier in the day it looked as if mortgage rates would be pressured higher on economic data that was in line or better than analysts were expecting (good news is good for stocks but bad for rates). [...]
Pingback from My Mind on Mortgages » Rate Update October 5, 2010
Time October 5, 2010 at 7:58 am
[...] the service sector than was expected. The news has sent stocks higher which would ordinarily be bad news for mortgage [...]
Pingback from My Mind on Mortgages » Rate Update October 13, 2010
Time October 13, 2010 at 8:06 am
[...] We hadn’t talked much about 3rd quarter earnings season which is now underway here on ‘rate update’ but this morning earnings reports from JP Morgan Chase & Intel are lifting stocks and hurting mortgage rates. [...]
Pingback from My Mind on Mortgages » Rate Update November 18, 2010
Time November 18, 2010 at 9:22 am
[...] The Federal Reserve Bank of Philadelphia reported earlier that an index of business activity for their region came in much hotter than expected. This has got investors optimistic about the broader economic recovery. Good news for the economy is good for stocks but bad for mortgage rates. [...]
Pingback from My Mind on Mortgages » Rate Update November 24, 2010
Time November 24, 2010 at 8:39 am
[...] have started the day higher which is pressuring rates higher. I still believe a long-term locking trend is [...]
Pingback from My Mind on Mortgages » Rate Update December 7, 2010
Time December 7, 2010 at 9:10 am
[...] the next 24 months. Stocks like certainty and they are rallying this morning which is putting pressure on rates to move [...]
Pingback from My Mind on Mortgages » Rate Update December 13, 2010
Time December 13, 2010 at 9:09 am
[...] According to a WSJ survey released today economists now believe the economy will grow faster both in the 4th quarter of 2010 and throughout 2011 compared to their expectations last month. This is good news for the economy but bad news for mortgage rates. [...]
Pingback from My Mind on Mortgages » Mortgage Rate Update December 21, 2010
Time December 21, 2010 at 9:21 am
[...] At the open stocks are trading in positive territory thanks to announcements from two different Canadian banks that they be acquiring two US financial institutions. This may be a sign of things to come because the US Dollar is currently trading at decade lows versus foreign currencies. Takeover announcements typically help stocks to trade higher because businesses are usually acquired at a premium to their stock price AND as we know what is good for stocks is often bad for mortgage rates. [...]
Pingback from My Mind on Mortgages » Mortgage Rate Update January 3, 2011
Time January 3, 2011 at 9:14 am
[...] hits a 2-year high. Over the past 3 months the relationship between stocks and interest rates is very clear. Stocks have rallied pushing rates higher: Current outlook: [...]
Pingback from My Mind on Mortgages » Mortgage Rate Update January 4, 2011
Time January 4, 2011 at 9:19 am
[...] in the financial press that stocks may be over-bought and ripe for reversal. This would likely support bond prices and push yields lower so I will switch my outlook to neutral. I expect rates to remain unchanged until Friday when [...]
Pingback from Mortgage Rate Update » Rate Update for August 7, 2008
Time August 7, 2008 at 7:12 am
[...] helping rates is a weaker stock market (to understand dynamic between stocks and mortgage rates click here). The Dow Jones Industrial Average is currently trading over 100 points lower after a slew of [...]