“Operation Twist” mean Lower Mortgage Rates?

Arizona Mortgage rates get lower

The Federal Reserve made an announcement today that pushed mortgage backed securities higher than ever before. The Fed Reserve announced “Operation Twist.”  In short, the Fed decides to sell $400 billion in short term securities and reinvest that same $400 billion in long term securities – specifically mortgage backed securities.  This move will support current low (maybe even lower) mortgage rates. Why is this important to what you and I do?  In the short term it is significant because today’s movement in mortgage bonds could push mortgage rates to new all time lows tomorrow when the market opens.

Does the jump in bond pricing today impact mortgage rates?

Interest rates and mortgage bonds have a relationship similar to the one you and your friend had when you hopped on a teeter totter.  When one of you went up, the other went down and vice versa.  When mortgage bond prices (measured in basis points) go up mortgage rates go down and vice versa.  That is what happened today after the Fed’s announcement. Investors felt the decision to roll out Operation Twist was a sign of economic instability.  Fed Chair Ben Bernanke basically told them it was in August when he said the Fed needed more time to discuss a plan to help the economy’s “disappointing growth.”  Today the plan was unveiled and investors responded. 9 x’s out of 10 news that indicates economic instability will make investors pull cash from stocks (which can fluctuate drastically with the economy) and then push that same cash into bonds (where it is safe regardless of what the economy does). Its basic preservation of capital. Its better to make a 0% ROR than to lose money. All you have to do is look at 2 things today to see that this is exactly what happened.

1. Stock market plunged (Dow Jones -234 points)
2. Bond market soared (+134 basis points)

 As a result, we should see the teeter totter effect tomorrow: Higher Bond Prices = Lower Mortgage Rates.  Today’s surge in bond prices and tomorrow’s expected dip in mortgage rates may hold. On the other hand, this may turn out to be a knee jerk reaction to the markets take on the Fed’s Plan.  Time will tell.

Agree or disagree with Operation Twist, now is a great time to take advantage of low mortgage rates.

By Jeremy House

Trackbacks

  1. […] following the government’s announcement of “Operation Twist” in late September (click HERE for more details). As I mentioned in my post right after the announcement, I felt that the drop […]

  2. […] the housing market) by augmented record low mortgage rates is Yellen’s goal.  It worked last time, just not well enough […]

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