Yesterday, mortgage backed securities took their direction from treasuries and sold off about .25 in discount.  As mbs sell off and move lower in price, it causes interest rates to move higher.  So far this morning we have regained all we lost yesterday and some.  Treasuries are rallying higher which is helping mbs improve this morning.

Today we got the release of consumer inflation numbers in the form of the consumer price index(CPI).  Economists where expecting the overall reading to come in at a month over month increase of .3 and the actual reading came in right on expectations.  The core reading, which strips out food and energy, came in slightly higher then expectations at .2%.   Year over year consumer inflation shows a 0.0% flat reading and this is the lowest level since 1955.  So, we have yet another report showing that inflation is of no concern now and this is also the opinion of the federal reserve.  The reason why inflation is the biggest enemy to low mortgage rates is that it eats away at the fixed return of the investment.  A mortgage backed security, like a treasury note, pays investors a fixed rate over time.  So, let’s say an investor earns a fixed income of $10,000.  What the investor can do is take that $10,000 and buy $10,000 worth of goods and services.  Next year, when the investor earns the same fixed income of $10,000, can he/she buy the same amount of goods and services?  Not if inflation is present because the prices of the goods and services he/she buys is more expensive.  So, as inflation moves the prices of goods and services higher, the value of the fixed income return gets lower and lower over time.   This is why inflation is the biggest enemy to low mortgage rates. 

There are no other economic reports coming out today and as I have been typing this update, mbs have continued to move a little higher and treasuries continue to rally as well.  I suspect that we will see par interest rates today anywhere from 4.75% to 5% depending on the lender.  Early reports from fellow mortgage professionals are saying that lenders rate sheets are about .25 better this morning in discount.  Like the past several days you should be able to keep your eye on the 10 yr treasury for a sense of how mbs are doing.  Currently the 10 yr yield is at 2.76, and it that can continue to move lower, mbs should follow.  Keep in mind, the yield and the price has an inverse relationship.  As price moves higher, yield moves lower.  So far this morning, the 10 yr is moving higher in price which is lowering the yield.  If this continues, it should help mbs to move higher in price and the yield(interest rates) move lower.  If we start to see a significant move one direction or the other, I will get back to you to let you know.