Financial investors essentially have three choices when they invest their money: stocks (equities), bond funds, or a mix of the two. Bonds tend to offer lower returns, but are less risky. Stocks are riskier, but have the potential to offer higher returns.
Many investors have money in both and are constantly balancing their portfolios based on the current state of the financial markets and what they expect to happen in the future.
Two of the bond-type options available to investors include:
- US Treasury bonds (also referred to as Treasury notes), which carry terms that can vary from one year or less up to 30 years. Regardless of their term, they are solid investments.
- Mortgage backed securities (MBSs), in basic terms, are large bundles of mortgages, often numbering in the thousands that are bought and sold in the financial markets. Chances are that the mortgage you have now, or will have in the future, will find its way into one of these bundles. MBS products compete with Treasuries for investors’ dollars.
So, what does all of this have to do with fixed mortgage rates?
As the US government adjusts the Treasury bond rates to manage economic policy, mortgage backed securities look more or less attractive to investors: when Treasury rates increase, MBS fund managers will instruct the lenders from whom they buy mortgages to start increasing their mortgage rates.
Investors, who know that Treasury products are highly secure, are less likely to want to take more risk for the same return were they to go with the MBSs.
However, if the rate of return on an MBS is higher than that of a Treasury product, this will catch the attention of investors, even though there is more risk. MBSs will become more attractive, no matter which way Treasury rates are moving.
Need more information? Contact your mortgage professional for details.