If we go back to the first business day of 2009, conforming 30-year fixed rates were 5%, the exact same as they are today, and all-time record rate lows were achieved twice during 2009: in April and again in late-November. Those record low rates were 4.78%, which is .22% lower than today.

For the real story on rate fluctuations, we have to back up prior to 2009. In November 2008, the Fed’s overnight bank-to-bank Fed Funds Rate was 1% versus 5.25% when the credit crisis began the first week of August 2007. By comparison, conforming 30-year fixed rates were 6.125% on November 17, 2008 and 6.625% on August 6, 2007. So the Fed cut overnight rates by 4.5% in the heat of the credit crunch, and 30-year rates only dropped 0.5%.


For those who may think mortgage rates are directly tied to Fed rates, the stats above prove that isn’t true. More definitive proof comes from what the Fed did next. Knowing that mortgage rates are directly tied to mortgage bonds, they announced on November 24, 2008 that they’d buy $500b in mortgage bonds from January through December 2009.

The Fed knew that pushing up mortgage bond prices with buying would push mortgage bond yields—or rates—down. And since cutting overnight rates didn’t have much impact on long rates in the heat of the crisis, they embarked on this unprecedented program.

Their plan worked and 30-year conforming rates dropped from 6.125% to 5% in six weeks. The Fed expanded their program twice during 2009: on March 18 they increased the mortgage bond buying budget to $1.25t, and on September 23 they extended the buying timeline until March 31, 2010.


A critical element of the 2010 rate outlook is the 1.25% rate drop that occurred from November 24, 2008 to January 1, 2009. This drop to rates we still have today happened before the Fed spent one penny buying mortgage bonds.

The massive mortgage bond rally that pushed rates down to today’s levels came from large institutional investors around the globe who knew the Fed’s commitment to the mortgage bond market was a great opportunity.

The money manager strategy was simple: buy before the Fed bids up mortgage bond prices, and sell at a profit before the Fed starts selling.

This is no secret. Most major money managers have publicly remarked about this. Bill Gross who heads PIMCO, the world’s largest bond manager, was clear and explicit about recommending this “buy-before-Fed, sell-before-Fed” strategy in his January 19, 2009 Investment Outlook.


So today the Fed is $1.11t or 89.14% into their mortgage bond budget with a little less than 13 weeks left in their buying program. This cuts their average weekly buying power to about $10.5b, and the average since they extended the timeline has been about $16b per week.

So the Fed’s ability drive down rates with mortgage bond purchases will decrease and private selling pressure will increase. This equation generally favors sellers of mortgage bonds which would push rates higher. However, some balance comes from a decrease mortgage bond supply to absorb as refinancing activity slows.

Inflation is another key issue in 2010 since bonds will sell off (pushing rates higher) if inflation becomes a threat. Inflation drives up long rates in two ways:

First, inflation erodes the return of a fixed yield such as a mortgage bond yield, so investors tend to sell when they see higher inflation. And remember when bond prices drop in a selloff, rates rise.

Second, with overnight rates at record lows, global investors can borrow short term funds very cheaply and reinvest into long bonds like mortgage bonds. This carry trade gets wiped out if inflation becomes an issue because the Fed hikes short rates which forces selling of long-term securities like mortgage bonds to repay the short term loans.

The end result of all these factors leads me to my outlook for +1% on 30-year fixed rates by September 2010.


Not including the December 2009 jobs numbers that come out Friday, the economy lost 4.08m jobs in 2009 and unemployment rate went from 7.6% to 10% in 2009. Economic growth as measured by GDP was +2.2% for 3Q2009 (latest data available) following four straight quarters of contraction.

There’s lots of chatter about the end of the recession, but the jobs situation continues to be largely overlooked when factoring economic improvement. The NBER officially called a recession early-December 2008 and said at the time that it had been in effect for a year.

So it’s easy to call the end of the recession based on expectations that 4Q2009 could be a second consecutive positive GDP period, but it’s more complicated with 10% unemployment. The November report showed just 11,000 jobs lost, which is a huge improvement from the 370k average monthly loss for the year. But our labor force grows at about 125,000 workers per month due to population growth, so we’d need to add that just to stay even.

So any economic recovery defined purely by GDP looks to be limited due to the jobless pressure.

CONFORMING RATES ($200,000 – $417,000) – 1 POINT

30 Year: 5.0% (5.12% APR)

FHA 30 Year: 5% (5.13% APR)

5/1 ARM: 3.875% (3.99% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 1 POINT

30 Year: 5.25% (5.36% APR)

FHA 30 Year: 5.25% (5.38% APR)

5/1 ARM: 5.25% (5.37% APR)

JUMBO RATES ($625,500 – $3,500,000) – 1 POINT

30 Year: 5.875% to 6.25% (6.02% to 6.37% APR)

5/1 ARM: 5.25% (5.43% APR)

Scenarios assume full doc pricing on purchase or rate/term refi (but not cash-out refi) loans for borrower with 720 FICO score or greater, at least 20% equity (unless FHA), and 6-12 months reserves left over after close (retirement assets counted at 70% of value for reserves). Better or worse rates apply to specific client profiles. Better rates are available using tax deductible points. ARM rates adjust the first month after initial fixed period shown, and once per year thereafter until year 30. Adjusted rate calculated by adding 2.25% margin to 1yr LIBOR index at time of adjustment. At first adjustment LIBOR+margin cannot exceed start rate+5%, subsequent yearly adjustments can never be greater than 2% per year, total of all adjustments for 30yr life of loan can never exceed start rate+5%. This is not a loan commitment nor a loan guarantee, rates based on loan amount ranges shown and rates available at the time of production. Rates subject to change without notice. California Department of Real Estate license #01376428. Equal Housing Lender.