Throughout 2009, the Federal Reserve Board took unprecedented steps to support the mortgage market by directly purchasing mortgage-backed securities (MBS) on the open market, amassing more than $1.2 BILLION by the time the program officially ended on March 31, 2010.

The price of the MBS 4.5% began to fall on March 24, 2010 in anticipation of the end of this program.

Market participants correctly observed that if the biggest buyer (the Federal Reserve) was no longer in the game, the demand side of the supply-demand equation would shrink and thus prices would fall, meaning that interest rates would rise.

Seasoned observers felt that rates on 30-year fixed-rate mortgages had been kept artificially low by the Fed’s actions and would therefore rise from less than 5% to the 6-7% range. once the Federal Reserve had exited the market. That began to happen when mortgage interest rates rose half a percentage point in early April 2010 in the first three weeks after the end of the Federal Reserve’s 18-month market involvement.

Then on April 26, the MBS market caught a bid and prices started to rise again. On April 27, they rose to the highest level since March 24, sending mortgage interest rates lower again.

What happened?

The short answer to that is that a “flight to safety” began in earnest due to an external event… Greece’s impending sovereign debt default.

Greece is not the only European country facing financial challenges. The acronym “PIIGS” was aptly coined to reflect the extreme financial difficulties facing Portugal, Ireland, Italy, Greece and Spain. As the markets began to understand that the bonds of all these countries (and many other countries around the world that have made financial commitments they may not be able to meet) were in danger of default, fixed-rate investment money began to leave these markets in search of the relative safety of the United States.

The US bond market has been an immediate beneficiary of this “flight to safety”, with the 10-year Treasury note yield falling from 3.8 to 3.62 on April 27. And the 10-year Treasury bond is the unofficial “index” of the yield on mortgage-backed securities.

What that means for homeowners is that this temporary flight to safety has delayed the impact of the Fed’s exit from the mortgage market, thus creating a last chance to lock in low rates on fixed-rate mortgages.

The underlying fundamentals here in the US have not changed. Government spending is still out of control and the resulting deficits are still putting upward pressure on interest rates. This low interest rate environment cannot and will not last.
For anyone looking to lock in low, long-term fixed rates, there is one more window of opportunity, but it may be very short. In the not too distant future, we may look back to the spring of 2010 as the last time fixed mortgage rates were below 7%.