(1) While it is true that the Treasury does not set home mortgage rates, they do possess a very, very large checkbook. Using that checkbook, they can simply become a large-scale buyer of MBS. As they bid the prices up, the yields come down (There is an inverse relationship between price and yield). As we approach zero interest monetary policy, the Fed reaches a point where it cannot lower rates any further, so buying these assets becomes another useful tool to help get rates down. This is referred to as quantitative easing.

(2) Don’t forget the power of the media (and they have considerable power) to change the direction of trades throughout the day. With the power of a few keystrokes, a reporter can post a headline that can either cause yields to surge or to send them into a tailspin. Bloomberg is an excellent source for commentary on the bond market.

(3) Since the announcement of large scale MBS buying before the Thanksgiving holiday and the recent announcement of the “Treasury 4.5%” plan, MBS yields have plummeted from 5.3% to the low 4% level. As reported on Bloomberg late Friday, many dealers believed that the market was overbought and sold off into the close to lock in profits and hedge their bets over the weekend. You can watch intra-day MBS action by going to http://tinyurl.com/fnmambs and clicking on the “1d” chart. You’ll see the sell-off on the chart. This does not necessarily mean that rates are going up again.

All of the above applies to MBS that are issued by the two GSE’s (government sponsored entities), Fannie Mae and Freddie Mac, for conforming and high-balance conforming loans. Ginger is correct that this does not apply to jumbo loans. There is no real market for jumbo MBS at the moment. Most of the jumbo loans out there right now are being held on the books of the bank/credit union rather than being sold into the secondary market. We really need to see a recovery in jumbo market as well to move forward.