Mortgage Rates Respond to Treasury Auction

Mortgage rates moved a bit lower today following a well-received 30yr Treasury auction.  Treasury yields don't directly dictate mortgage rates, but Mortgage Backed Securities (MBS) that actually do dictate rates - tend to come along for the ride when Treasuries make big moves.  That's what happened today.  The most prevalently quoted conforming 30yr fixed rate for best-case scenarios still is at 4.375%, but 4.25% is in the picture. 

Treasury conducts auctions for its various maturities once a month, and today's 30yr Bond auction was the last of the week.  This is important because primary dealers (the biggest financial firms that buy debt directly from the government) are required to bid on Treasury auctions.  That means there is a certain amount of apprehension as to how the auctions will go, and occasionally a certain amount of relief when they're over.  Sometimes the auctions go better than others and sometimes that 'relief' is more pronounced.  Today was a 'win' on both accounts.

The strong auction results were accompanied by headlines out of Iraq as well as heavy selling in stocks.  Both potentially contributed to the move lower in Treasury yields.  The secondary mortgage market was merely a bystander, but willing enough to come along for the ride. 

This move has the potential to mark a reversal from what has been a fairly pervasive trend toward higher rates since late May.  Considering that generally strong relationship between Treasuries and mortgage-backed-securities, it makes sense to keep an eye on 2.57% in 10yr Treasury yields.  If we happen to be moving lower from there tomorrow, it would be a good sign.

In summary, what a difference a day makes! Markets were complacent yesterday, but now today's 30 year bond auction today surpassed expectations and rates made a stronger move. Looks like floating might be an acceptable risk. Be sure to tune back in tomorrow.