THEY SAY IT TAKES TWO TO TANGO...

... And the relationship we see in the markets between Stocks and Bonds is a dance of its own, as one often improves at the expense of the other... while one kicks higher, the other often dips lower. But why... and how does this impact home loan rates? Here’s what you need to know.

 
Weak economic news normally causes money to flow out of Stocks and into Bonds, because investors see Bonds as a safer haven when the economy appears weak. An increased demand for Bonds means that Bond prices move higher, as with any item when there is heavy demand for it. And when Bond prices move higher, it means that Bond yields - and consequently home loan rates - move lower. 

So any movement of money into Bonds typically helps home loan rates improve. Conversely, strong economic news normally has the opposite result. When the economy appears strong, investors move their money to Stocks in the hopes of taking advantage of any gains... and often this money is being pulled back out of Bonds. In turn, this often causes Bonds and home loan rates to worsen as a result.

Last week, we saw this dance in several instances. Through the week, Stocks danced higher as strong earnings reports continued, with more than three-quarters of the S&P 500 companies who've reported second quarter earning beating expectations. In addition, conditions in Europe look to be improving... and this is quite the turnaround from just a few weeks ago when things looked to be horrible. The bank stress tests - whether they are to be believed or not - appear to have helped conditions overall, and brought some strength to the Euro and also to our Stocks, which improved on the news.   This is important to note, as part of the big rally we have seen in the Bond market and the big improvement in home loan rates came from the rush of funds from Europe to the US, and in particular to our Bond market, as protection from a precipitously declining Euro. If conditions in Europe continue to improve, money might just flow back over to Europe, and Bonds and therefore home loan rates could worsen.

However, not all of our economic news has been positive lately, and some of this weaker economic date helped Bonds and home loan rates maintain their historic levels last week. Durable Goods Orders, manufactured goods lasting at least three years, fell 1.0% for June. This was the biggest decline in nearly a year, signaling that economic growth was stagnant in the second quarter. 

In addition, the Advanced or first reading for 2nd Quarter GDP showed the US economy slowed to a 2.4% annual growth rate, which represents the lowest number in a year. These readings show that consumers and businesses remain cautious and reluctant to spend money. And that's understandable... concerns remain about the labor market, the housing market, and the economy overall.  

All in all, the news from last week helped Bonds and home loan rates improve, and they ended the week slightly improved from where they began.