What Causes Mortgage Rates to Rise?

If Retail Sales in January were better than expected, that's good news for Stocks. But if money flows into stocks, this causes money to be pulled out of Bonds. That in turn causes long term Bond prices to move lower. If US Fed Reserve Board cuts the short term rate on funds, that worries bond traders about the risk of more inflation. Some folks believe that cuts to the Fed Funds Rate generally cause home loan rates to rise, not decline. Why? Because Fed Rate Cuts can spur on more inflation, and it becomes less expensive to finance business and personal purchases. As a result, inflation erodes the value of the fixed return provided by a Bond. In the face of inflation, long term bond prices fall, and home loan rates rise.
Posted by Harrison K. Long, Explore Properties Group, Feb. 17, 2008