The Mortgage Reports Blog

How Herd Mentality Determines The Direction Of Mortgage Rates

If there's one thing that drives mortgage markets batty, it's uncertainty. 

When the economy is an undecided issue, investors don't know how to place their bets and it leads to volatility.

One day, the markets lean to the left.  The next day, they lean to the right.  There's no real reason why it happens -- it's all on "gut feel".

Psychology of this nature is highly susceptible to Herd Mentality.  It's part of the markets and we've all come to accept it. 

When traders use that sixth sense, it creates an unstable mortgage rate environment because there's no conviction that drives buying and selling behavior -- it's all just following "the crowd".

And right now, because "the crowd" is betting against the economy, mortgage rates fell last week.

Meanwhile -- without hard data to fall back on -- a very heated debate has emerged among market players.

The Expectation is More Important Than the News Itself

The first Friday of every month, the government releases the monthly Non-Farm Payrolls report. This is the measure of how many new jobs were created in industries other than farming in the month prior.

Ahead of the release, there was a run in the Bond Market, pushing yields up. The yield curve steepened as the market players priced in inflation concerns. The estimate for the non-farms payroll release was 225,000.

The yield seemed high given the relatively balanced data released earlier in the week including New Home Sales and a revision on Q4 Productivity.

Whisper numbers confirmed that the market priced in an upside surprise on the payroll figure.

Released at 8:30 A.M., the actual non-farm payrolls figure was 262,000. Immediately, the yields pushed higher but that proved to be a knee-jerk reaction. The market quickly turned and then surged forward as inflationary pressures were revealed to be not as large as the whispers' prediction.

To a novice, the movements of Friday's markets are counter-intuitive.

It can be quickly forgotten that bond prices -- like stock prices -- are reflective of opinions of future movements. The consensus estimate of 225,000 was lower than what traders believed the report would read. Therefore, they bought positions that reflected that belief, pushing up yields.

The traders were correct -- the numbers came in higher than expected. However, the non-farm payroll figure was not high enough to support the inflationary positions that many traders had taken. The market rallied around the covers and the yields fell.

The same concept applies to the stock markets. Bank of America (BAC) may meet (or even exceed by 2-3 cents), the analysts expectations of $0.97 per share this quarter, but if investors believed the company would return $1.02 per share, they would sell their positions until the market reached equilibrium.

There is always more than the news, there is also the expectation of the news.

(Image courtesy: Badge714)