Market Comment
Mortgage bond prices remained volatile last week with trading tied to both the Treasury market and stocks. The Treasury market (10 and 30-year bonds) lost significant ground early in the week as investors fled the low yields, opting to purchase Mortgage Backed Securities instead. For the week, interest rates on government and conventional loans fell by 3/8’s of a discount point.

The consumer price index Friday will be the most important event this week. The bond market closes early Friday in observance of Martin Luther King Day on Monday, January 19th.

Treasuries
The 10 and 30-year Treasury bond yields are often viewed as “benchmarks”, reflecting the overall state of interest rates in the US economy. Many people track these bonds as a barometer for mortgage interest rates. However, the Treasury and mortgage markets trade independently.

The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) differ significantly. Treasury securities represent money needed to fund the operations of the US government. MBSs, on the other hand, represent borrowing by homeowners. Demand for mortgage credit is seasonal and is also affected by the state of the overall economy.

In the absence of information directly related to the mortgage interest rate markets, Treasury information can be useful. However, mortgage interest rates can vary significantly. In fact, many times the Treasuries will trade wildly while MBSs only see minor price changes and vice versa. Thus, differences between Treasuries and MBSs sometimes lead to misleading price change differentials.