How bonds affect mortgage
rates?
Bonds affect mortgage rates
in many ways. Mostly the investors
are the ones who determine whether
the rates are high or low. It
is the supply and demand system
which indirectly controls the
rates of the mortgages.
If the demands for the bonds
are high then, the rates of
the mortgages are deemed lower
than they are supposed to be
and if the demands for the bonds
are low, then the rates for
the mortgages increase to accommodate
for the lack of demand in the
market.
Investors
How do you study the needs
of the market? Mostly, the entire
market will consist of homeowners
and investors who are looking
for two things in particular,
one, to have low payments on
the loans they take up, so the
financing of the loan is cheap
and second is to have returns
on investments which are high
and profitable.
Most investors will only buy
high yielding mortgage bonds.
If the mortgage bonds tend to
be yielding too low an amount
then, the investors are in a
position to take their money
elsewhere, where the returns
are higher as the market is
huge.
The demands from an investor
in an investment area of the
market play a huge role in moving
the market rates and yields.
With the options of investments
in the market, the investor
is capable of moving anywhere
to invest. It that respect,
the
mortgage bonds have to be
attractive enough to pull the
investors from other areas of
investments and influence them
to mortgage bonds. Usually when
investors’ demands in
the mortgage bonds deplete,
the market will increase the
interest rates to attract the
investors into investing in
mortgage bonds again.
Once an equilibrium is reached
where the interest rates and
investors are on par, and the
demand is high, the interest
rates will now take a fall.
When there is too much demand
of something in the market,
there exist very little competition;
hence the interest rates available
will not be as attractive. But
at this point of time, there
are enough investors in the
area of mortgage bonds, where
the market does not need the
rates to be high.
Financial institutions
Though the process sounds
simple, it is by far anything
but easy. The mortgage market
not only has to answer to the
investors but also the financial
institutions. The financial
institutions are the ones who
indirectly cause the mortgage
rates to rise or fall. If the
financial institutions are not
interested in mortgage bonds,
then the market for the bonds
will not exist. It works both
ways. It is a demand of both
the investors and financial
institutions which affect the
mortgage rates in the market.
The financial institutions
would want the highest possible
return for their investments;
hence the lowest possible interest
rates for them. As compared
to the investors who would wants
the lowest amount of financing
which would conclude that they
would expect the highest
interest rates.
The pull between the two, investors
and financial institutions decide
the interest rates of the mortgages.
In the end, though it is a demand
supply process, the financial
institutions decide the end
results of the rates. Thus,
proving to be the role players
to the changes in the mortgages
rates, affecting the rates directly
with every decision they make.
http://library.hsh.com/?row_id=85
http://useconomy.about.com/od/bondsfaq/f/Bonds_Mortgages.htm
http://www.mtg-net.com/sfaq/faq/whyrateschange.htm
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Copyright
2008