What drives mortgage rates? Inflation and uncertainty. Inflation is not present right now and according to the majority of the Federal Open Market Committee members it is not expected to be much of a concern for the near future. Uncertainty, though, is alive and well. Continuation of the recent economic improvement in the US is considered anything but certain. Global economic growth has been a question mark. The ability of several European nations to satisfy their debt obligations is uncertain. This uncertainty has resulted in tremendous volatility in the stock market, which has caused tremendous volatility in mortgage-backed securities prices. Daily, global headlines suggest to investors its time to shift assets to more or less risky investments. That is what happened last week. After reaching the highest level of the year, mortgage-backed security prices were beat down on Thursday based on headlines from Australia, China, and Europe, all which suggested improving economic conditions. Investors sold low risk bonds and bought higher risk stocks. The Dow gained 270 points. MBS prices lost 25/32nds. This pattern has been in place now since April when the European debt crisis raised its ugly head. Look for volatility in mortgage-backed security prices; and therefore, mortgage rates to remain high as long as the economic outlook remains so uncertain.
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