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Bond Market = Mortgage Lender
In the last few years, mortgage lenders and borrowers have spent more and more time discussing the bond market.
In the last two weeks, as mortgage rates have risen to levels not seen since May, some of these discussions have gotten downright cranky.
Just when did the bond market get to be such a big deal? And by the way, what is it?
The financial markets are divided into two pieces: equity, and credit. The equity markets are stock markets; the trading of ownership interests in corporations.
The credit markets buy and trade IOUs -- literally, promises to repay.
Whose promises? Everybody's. The City of Boulder's IOUs show up in the municipal bond market. IOUs issued by Storage TEK are traded in the corporate bond market. Your car loan, your credit card balances, and your mortgage all are traded. Bonds are just relatively long term IOUs.
These IOUs trade based on security (will I get paid back?), length of time outstanding (when will I get paid back?), and yield (how much will I get paid for my risk?).
Formal markets for debt have existed since at least the Medicis, and informal ones go back to the first promise to return a stone axe together with a dead rabbit for interest.
It is only in the last twelve years that the bond market has become the dominant financial market in the world. In these same dozen years, for different reasons, the bond market has become the sole supplier of fixed rate mortgages.
The big bond market, the granddaddy of them all, is the market for United States Treasury IOUs. Until about 1980, it wasn't such a big deal because there weren't many Treasury IOUs. The United States had not borrowed its first trillion dollars until early 1981. Now it's four trillion. In twelve years.
That's a lot of IOU's to sell and trade. When their values move, the whole financial world shakes.
Until twelve years ago, mortgages mostly came from Savings and Loans. Then, mortgage prices and terms were scattered all over the place as each institution made its own decisions. We are short about 5,000 S&Ls in these dozen years. Now, all fixed rate mortgages come from an annex of the bond market (about a trillion dollar hole in the wall), all at pretty much the same prices and terms.
Despite the enormous size and power of the bond market, it gets little attention from the news media. This information vacuum creates a good deal of anxiety for mortgage applicants.
It was not until 1980 that the Wall Street Journal had a daily column on the credit markets. The New York Times' national business edition took another three years. Louis Rukuyser's Wall Street Week treats the bond market as some distant irritant.
Financial Network News has some bond market commentary each morning, but it is outnumbered twenty to one by stock market blather. Every evening radio and television news program dutifully reports the change and close of the Dow Jones Average. But it takes a bond market earthquake to get notice in the popular media -- even though, these days, bonds drive the Dow.
If you are waiting in line to refinance, sweating it out until your builder finishes your house, or buying something already standing, welcome to the bond market tub.
Welcome to the shadowy motivations of the holders and buyers of four trillion dollars worth of Treasuries. They are the same people who will finance your home.
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