“Buy the rumor . . . sell the news”

Last month, the Federal Reserve Open Market Committee reduced the Federal Funds rate by .25%.  Mortgage interest rates increased by about .125% following the Fed announcement.

What’s up with that?  Why would mortgage rates rise in the face of the Fed’s softening of interest rates?

Mortgage interest rates are largely determined by bond traders in the equity markets.  One of their favorite things is to try to anticipate the future direction of interest rate movements.  If they can do so successfully, they may have an opportunity to profit from the anticipated rate change by placing their bets before rates move.

Once traders get wind of anything that will move interest rates in any direction, they will act on that information by placing trades that they hope will profit them.  In this way, the markets and the level of interest rates tend to move in the direction of the anticipated change before the change takes place.

You may have heard the market adage “buy the rumor,  sell the news.”

If you remember only one thing, remember this.

If you are thinking about, reading about, hearing about, an upcoming interest rate reduction in the news  . . .  the chances are that the anticipated rate reduction is already reflected in current mortgage rates.

So back to the September Fed Funds rate reduction.  For weeks before the meeting, speculation about this rate reduction was all over the news.  The markets expected a .25% rate reduction but hoped for a reduction of .5%.  When the .25% reduction was announced, the markets were disappointed (because it wasn’t a .5% reduction)  and mortgage rates actually rose.

The message?  When interest rates are at a very low level, as they are now, it seldom pays to delay beneficial actions in the hope that interest rates will go even lower.

Predicting interest rates is a bit like predicting the weather . . . and, you know how that goes.

Not sure?  Call us at 301 468-5600 for straight answers.  Your call is always welcome at Primex.