After the most major meltdown in U.S. stock trading since September 17, 2001, markets appear to be recovering this morning.

This should reverse the drop in mortgage rates we saw towards the end of the day yesterday.

To understand why mortgage rates go down when stock markets suddenly fall, we must look at the investor’s perspective.

When stocks sell off, investors are suddenly holding cash and so they look for places to park those dollars. Bonds are usually the beneficiary which is why major stock market drops are usually accompanied by large gains in bonds.

Because mortgage rates are born from the prices of mortgage-backed securities — a type of bond — days like yesterday are good for home owners and home owners-to-be. As expected, mortgage rates fell late yesterday and have extended those decreases into today.

As stocks recover, however, dollars are pulled from bonds and back into stocks, pushing rates upward.

So far this morning, about half of yesterday’s gains have already been erased.

The Flight-to-Quality continues in the bond markets.

Iran said today that the suspension of its uranium enrichment program “will never happen”, fueling speculation that an international stand-off is pending. The United States has sent additional aircraft carriers to the Gulf in response.

Normally, this action is enough to frighten markets into bonds by itself, but a suicide bomber’s attack on a U.S. military base in Afghanistan playing host to Vice President Cheney is adding an extra jolt. 14 people died in the blast.

Mortgage-backed securities (and mortgage rate shoppers) are benefitting from the international uncertainty this morning. But, eith a slew of market-moving data due Wednesday and Thursday, expect rates to return to higher levels as traders take profits toward the end of the day.

Source
Iran won’t halt atomic work, snubs big powers
Edmund Blair
Reuters, February 27, 2007 9:19 a.m.
http://www.reuters.com/article/worldNews/idUSL2722031920070227

Cox and Forkum Editorial Cartoons
February 25, 2007
http://www.coxandforkum.com/archives/001052.html

In defiance of the UN Security Council, Iran is taking another step towards successfully building a nuclear weapon.

Yesterday, it was reported by the International Atomic Energy Agency that Iran expanded its ability to create nuclear weapons and that it plans to “turn on” at least 1,000 uranium-enrichment centrifuges.

Internationally, this decision creates questions (and fears) about Iran and its nuclear ambition. Traders respond to this by moving their money from risky economies to strong economies. Strong economies better protect and preserve investment dollars when global politics get “scary”.

A related strategy is when investors sell small cap stocks in favor of DJIA stocks during a market swoon. The jargon for this buying and selling approach is “Safe Haven” buying.

For mortgage rates, this is a good thing. The United States economy is considered a Safe Haven and investors tend to snap up dollar-denominated securities in the presence of political uncertainty.

More buyers of mortgage-backed securities means that the prices go up. And, as is always the case with bonds, higher prices mean lower yields/rates.

A little known fact about yesterday’s CPI numbers: they weren’t as inflationary as you would have otherwise thought. It all comes down to decimals and rounding.

What The Expectations Were

• CPI: 0.1% increase in January
• Core CPI: 0.2% increase in January

What The Headlines Reported

• CPI: 0.2% increase in January
• Core CPI: 0.3% increase in January

What The Actual Figures Were

• CPI: 0.174% increase in January
• Core CPI: 0.256% increase in January

The rounding from three decimals places to one can really warp the interpretation of data. After all, without three decimal reporting, Ty Cobb is a career .4 hitter and Ted Williams is no more special than Ginger Beaumont at .3.

Interpreting economic growth requires precision and the current rounding-in-reporting method is anything but.