How Mortgage Rates Behave Like The Sharper Image Wave Pool

Sometimes, the Yield Curve is "flat" and sometimes it's "steep". 

Mortgage rate shoppers care about the Yield Curve because the steeper the curve, the higher the interest rate premium on a 30-year fixed mortgage versus a shorter-term ARM.

Lately, the Yield Curve has been both flat and steep as investors try to make sense of the contradictory data about inflation worldwide.

A brief recap:

1. The Fed raised short-term interest rates, pushing up the relative risk of short-term government bonds.  Savings rate and time deposit instruments started yielding higher relative returns.

2. Global investors with few other good options, sunk money into the U.S. economy as a long-term bet.  The U.S. economy became a long-term hedge against short-term global volatility.

3. The Fed reintroduced the 30-year bond, creating demand on the longer end of the curve.  This steepened the inversion of the Yield Curve.

4. Europe, Japan and other nations see appreciable growth for the first time in nearly a decade.

5. The Yield Curve flatterns as money leaves the U.S. in favor of better returns in Europe and Japan.

I was talking with Bankrate.com's Holden Lewis about this equilibrium-seeking behavior and the best analogy I found was that Sharper Image Wave Pool.

Do you remember this office/executive gadget? 

A plastic, rectangular box on a pivot-type triangle was filled with Windex-colored "water" and just tipped from side to side, never balancing in the middle.  The water forever sought equilibrium and even the tiniest disturbance set it off.

The Global Economy is the same way.

Money flows from side to side, pivoting on economic data, trying to find a balance between risk and return.  Bumps or nudges upset the rhythm and causes movement of assets across borders.

A bad analogy?  Maybe.  But, still an important one.

As money moves, so do mortgage rates.  When money comes into the U.S., mortgage rates tend to fall.  When money leaves, mortgage rates tend to rise.