Mortgage ratesÃ‚Â moved moderately lowerÃ‚Â today, as financial markets positioned themselves for an important announcement from the European Central Bank (ECB) tomorrow regarding the possibility of tapering its asset purchases. Ã‚Â Much like the market movement seen in late 2013 following the Fed’s “tapering” message, stocks and bonds (yields) moved in opposite directions (i.e. stock prices higher and bond yields/rates lower). Ã‚Â This occurs because central bank purchases are like a rising tide that lifts all ships. Ã‚Â The more a major central bank is spending, the better things generally are for both stocks and bonds. Ã‚Â This runs counter to the typical intraday stock/bond relationship where yields/rates tend to move in the same direction as stock prices.
So why did we see a move ostensibly inspired by central bank policy before the actual announcement? Ã‚Â To oversimplify, traders have been betting on the ECB tapering. Ã‚Â This makes stocks lower and rates higher than they otherwise would be. Ã‚Â But traders don’t want to have open positions heading into the day of the announcement. Ã‚Â In other words, they moved back to the sidelines, which in this case, has the effect of pushing stock prices higher and rates lower.