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Chrisman's Corner: Rates Are Low (But It Is Important to Know Why)

Last week JMAC’s brokers were all reminded of what actually moves bond prices and rates, which have a direct bearing on mortgage rates. Just like any market, they know that supply and demand move security prices. Just like a 1973 Ford Pinto, or a poorly made suit, if there is no demand, the price must drop until a buyer comes forward.

Last week we had very little news from the United States. Exports were higher, domestic oil production has increased, and economists are talking about stronger 2014 economic growth. Initial jobless claims are at the lowest levels since 2006, leading to talk of a strengthening labor market. Typically, in the absence of other economic news, these factors would push rates higher. After all, if the U.S. economy is growing, and more people are working, the demand by companies and individuals for credit (borrowing) increases, and those lending money can charge a higher rate because of that.

But there was other news, and most of it came from other parts of the world. Euro-zone inflation fell to 0.4% in July, hitting a 4-year low, falling well short of the 2% target. The European Central Bank (ECB) is ready for large scale asset purchases (quantitative easing), if the euro zone approaches deflation. The job is complicated by a Russian ban on food imports from the European Union due to the crisis in Ukraine. Statistics showed that Italy slipped back into recession, and the German economy is stagnant.

On top of the economic numbers, crises in Gaza, Iraq, and Ukraine led to investors around the world wanting to put their money into assets with a minimum amount of risk. These are typically U.S. bills, notes, and bonds – and mortgage-backed securities.

So although we do not want conflict or turmoil in the world, they tend to nudge investors into putting their money into the bond market here in the United States, leading to lower rates and better mortgage prices for our broker’s clients.