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Bad economic news is good news for mortgage rates!

Mortgage interest rates are based on the bond market, which is heavily influenced by economic activity in the United States. Inflation is the primary factor that affects the Treasury bond markets and therefore interest rate levels. Treasury bond investors do not like inflation because it eats away at the value of their fixed return investments. When inflation is a concern, home buyers can expect mortgage rates to increase.

When the economy slows down, the threat of inflation is subdued and investors become more comfortable investing in long term debt. This is the reason the Treasury bond market rallies (bond prices move higher) on weak economic news. When the price of a Treasury bond moves higher an investor is forced to pay more for this investment, so its yield (return on investment) to the investor declines. When the yield on Treasury bonds decline, the yield on all similar investments (including mortgage loans) decline as well. If a lender can sell mortgage loans at a lower interest rate to investors, the lender is likely to pass on these lower rates to you, the borrower.

Throughout the month, the government releases different economic reports. As each report is released, the bond market immediately reacts (within minutes). Mortgage lenders base their daily interest rate pricing on these adjustments.

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Send e-mail to John Shea at: loan@mindspring.com
Last Modified: February 01, 1997