What Do Mortgages Have to Do with Bond Yields?

Friday, June 08, 2007 | 08:18 AM

That's the question that I've heard from a few readers and clients. Fortunately, the Ahead of the Tape column answered that exact question today:

"When Treasury yields rise, yields on bonds backed by mortgages tend to rise more. Higher mortgage rates make it less likely homeowners will either refinance their mortgage or buy a new home. Fewer prepayments mean mortgage investors risk holding more mortgages on their books than they expected. To counter that, they readjust by either selling mortgages or selling Treasurys as a hedge. Both of those things drive Treasury yields and mortgage rates higher -- and can push more mortgage investors to sell.

Until yesterday, many mortgage investors appear to have been sitting out the rise in rates. But economic strength and rising interest rates overseas in combination with a Federal Reserve that market participants see as increasingly unlikely to lower rates finally forced their hand.

Mortgage portfolios may be back in balance, which could stem the selling for now. But if rates stay high, many of the debt-financed transactions private-equity firms have been using to acquire companies will be a lot higher. At the same time, the recovery in the housing market that investors keep hoping for could get pushed back."

That's also an apt example of "reflexivity" -- George Soros' explanation for the impact of a (relatively) small market action could have on the broader market.

Bond analysts have been looking for a rate cut because, as Marketbeat explained, "benchmark Treasurys rarely trade at a level below the federal-funds rate unless more rate cuts look imminent." Hence, that's the main reason many of the bond gurus were (incorrectly) looking for Fed Rate cuts.

Now that the "No imminent rate cuts" has actually penetrated the brain pans of Bond analysts and traders, we can expect a pretty straight run towards 5.25%.


As an aside, when Jesse Eisinger was writing the Ahead of the Tape column, it was rumored to be one of the most read columns in the Journal (He's now esconced at Conde Nast's Portfolio).

When Justin Lahart took over the column, he had some pretty big shoes to fill. He was doing a more-than-adequate job, but as of late, he really seems to be blossoming -- breaking out from a big base, even. Many of his recent columns have been so sharp, timely and dead on, that I find myself reading that column first -- before I even see what's one the front page. Today's column is a perfect example.

Kudos !

UPDATE: June 12, 2007 7:06 am

The full article is now on the public WSJ site: 

Mortgage Jitters May Account For Bond Selloff


Mortgage Jitters May Account For Bond Selloff
Justin Lahart
WSJ, June 8, 2007; Page C1

Bonds Get Bashed
David Gaffen
WSJ Market Beat, June 8, 2007, 8:56 am

Friday, June 08, 2007 | 08:18 AM | Permalink | Comments (19) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post



TrackBack URL for this entry:

Listed below are links to weblogs that reference What Do Mortgages Have to Do with Bond Yields?:


How much do you want to bet that Bill Gross is in buying the 10 year into the puke fest he helped snowball. That guy is incredible, and deserves Greenspan. Mr DJIA 5000 was obviously talking his book...and CNBC was happy to give him the "bully" pulpit.

Posted by: Fred | Jun 8, 2007 9:56:44 AM

The comments to this entry are closed.

Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      


Complete Archives List



Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:

Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo



Odds & Ends

Site by Moxie Design Studios™