Market Conditions

It's Monday and other than the Dow tanking to 1997 levels not much is going on in the news that would affect mortgage rates. To top it all off there's more snow outside my window...

This morning I thought I'd give you a quick rundown of the gadget to the right under the Mortgage Calculator called Market Conditions. The two most important measures you can monitor here are 10-Year Treasury Notes and the Dow Jones Industrial Average.

Historically these are two easy-to-read indicators of the Stock and Bond markets. They usually tend to run in opposite directions. This means that while one is increasing the other is decreasing. If the DJIA is gaining it means there are more people buying stocks in general than selling. Now this has typically meant that the money to buy these stocks comes out of the Bond market. Unless you're a Wall Street CEO or the Treasury it's tough for the average investor to create money out of thin air which is why you must sell your fixed-income investments (bonds) to fund your purchase of stock.

Still with me? Good.

Obviously the opposite happens when the Bond market is rising. Unfortunately the causal relationship isn't as foolproof as it once was but that is a topic for another day.

To further complicate matters the reason we track 10-Year Treasuries is because they are very similar fixed-income investments to Mortgage-Backed Securities. They are similar in the rate-of return they yield to investors. Again though, this relationship isn't as strong as it once was due to a lack of liquidity in the MBS market. But, that is a topic for another day as well.

For the moment let's just believe we live in a ducky world where the relationships between all of these markets are absolute. If such were the case mortgage rates would drop as the yield on 10-Year Treasuries decreased. The yield would decrease as the Stock Market (DJIA) dropped. Thus, by looking at the level of the stock market and the corresponding yield on 10-Year Treasury Notes we would know if mortgage rates would be getting better or worse.

So, take a gander at the gadget on the right labeled "Market Conditions". The first ticker symbol you see is ^TNX which denotes 10-Year Treasuries. The number next to the symbol is the yield. The lower you see, the better. For sub-5.00% rates we will need to see this in the very low 2.00 range.

The ticker directly below ^DJI is for the Dow Jones Industrial Average. For mortgage rates to decrease we are generally going to want to see this decreasing. And there you have it! A down and dirty way to monitor the Stock and Bond Markets if you find yourself in the market for low mortgage rates.

- Andrew