Bond Market Dynamics Help Push Mortgage Rates Down

While Federal Reserve interest rate changes can impact the residential mortgage market, the Wall Street Journal wrote that the complex relationship between mortgage-backed securities (MBS) and Treasurys plays a bigger role in mortgage rates. When the market expects interest rates will drop, demand rises for lower MBS coupons where investors face lower prepayment and reinvestment risks. This puts downward pressure on nominal mortgage rates. Additionally, investors use Treasurys to hedge against MBS investments. Expectations of falling interest rates can increase demand for Treasurys, pushing Treasury yields–and mortgage rates–down further. 

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