As I write this the 10 year Treasury Note yield is taking out last weeks low settling in about 4.675%. Tony Crescenzi of Miller Tabak says the chatter of rate cut odds is hitting the bond market. The rout in the overseas stock indexes last night and general nervousness about liquidity in the credit markets has no doubt helped spur the buying spree.
Why is this important? In the market pre August 6th, the yield on the 10 year generally correlated with rates on mortgages with a fixed duration of 5 years or longer. In other words, if the yield on the 10 year was moving down rates on the 5/1, 7/1, 10/1 ARMs and the fixed rate 15 and 30 year mortgage were also typically declining.
Now the market is not reacting in the same manner. This is especially true for jumbo mortgages, those loans with amounts greater than $417,000. There are only reluctant bidders for the jumbo mortgages. You are more fortunate if your loan amount is $417,000 or less. Because of the liquidity that Fannie Mae and Freddie Mac can deliver the rates on these loans are more likely to track the bond’s movements.