This is a completely random analysis (from completely outside of my field of expertise) inspired by posts from Bespoke and Calculated Risk about 30-year average US fixed mortgage rates hitting their highest levels since April 2002.
My contribution to the discussion -
Month-to-month changes in 30-year fixed U.S. mortgage rates have been extremely predictable over the last 37 years. Put simply, mortgage rates exhibit tremendous follow-through; months when rates increase tend to be followed by additional months of increases, and vice-versa.
In the months following months when mortgage rates decreased, average rates declined an additional -0.97% and only rose 27% of the time. Conversely, in the months following months when rates increased, average rates increased an additional 1.06% and rose 65% of the time.
Note: the % change numbers above are a % of the previous rate. For example, a move from 5.00% to 5.05% would be an increase of 1.00%, NOT 0.05%.
How consistent has this observation been? Just for giggles, what if you could somehow trade these rate changes, going long when rates were expected to increase and short when they were expected to decrease. This is just a mental exercise, but it will demonstrate that this observation has held constant over the last 37 years.
The blue line represents actual mortgage rates and the red line our timing results. As the chart makes clear, the month-to-month follow-through observation has been extremely consistent for a very long time.
With rates sure to be up in July, this presages continuing increases in rates for August – more unneeded bad news for the housing markets.
Happy Trading,
ms
Data Source: Freddie Mac’s Monthly Market Survey for 30-year fixed rate mortgages. For simplicity’s sake, we have ignored points in our calculations.
Filed under: Follow-Through, Random Stuff | 5 Comments
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My email: michael @ marketsci.com (remove spaces)
that is high serial auto-correlation. Could be converted into a nice sharpe ratio. :)
Hi Michael,
You could come close to trading these changes, since the 30-year mortgage rate and the 10-year Treasury rate move similarly. My estimates show a correlation of 0.707 over the entire history of GS10 and MORTG on FRED. The 10-year Treasury monthly changes show similar first-order auto-correlation as well.
Best,
Josh
RE: Josh – interesting – I’d like to run some numbers on that – I wasn’t aware that degree of AC was present in treasury rates – thanks for the note.
I have calculated first order ACF on TY future (TY1 Comdty bloomberg ticker) and i don’t obtain a number particularly significant.
Which are yours numbers?
RE to Pete – I assume you’re referring to the last commenter’s suggestion of applying the concept to Treasuries rather than mortgage rates. I can’t remember the exact numbers, but basically, they agreed with you. There was some level of monthly follow-through, but it was much less predictable than for mortgage rates; so much so, that I don’t really think it’s useful for Treasuries.
Thanks for the follow up.
Happy Trading,
ms