Stock markets tanked last week behind high oil prices and weak employment data. 

Amid a sell-off that led to a 4.5% decline in the S&P 500, investors sought safety in the bond markets. 

As a result, mortgage bonds improved last week, driving some mortgage rates to their lowest levels in two years.

This week, with no economic data on tap, mortgage markets will find direction from a variety of sources.

The first is oil.  If oil prices fall this week, expect that mortgage rates will rise slightly.  Cheap oil can be fuel for an economic engine so if oil prices are lower, it could help stave off recession. 

No recession, though, means that inflation is more likely and inflation usually leads to higher mortgage rates.

The second source of direction will come from the three Fed officials scheduled to speak publicly this week. 

Talk of recession should drop mortgage rates across the board whereas talk of inflation should raise them.  Chairman Bernanke’s speech will draw the most attention; he speaks Thursday.

And lastly, mortgage rates could move this week on profit-taking from mortgage bond traders. 

Mortgage rates have fallen because there has been more demand for mortgage bonds.  More demand leads to higher prices which decreases bonds’ rate of return. 

If traders look to lock in profit, they will sell their mortgage bonds, reverse that process, and rates will rise.

(Image courtesy: The Wall Street Journal Online)

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