Whether you close your mortgage loan through a bank, a mortgage lender or a mortgage broker your loan will typically end up on what is commonly referred to as the “secondary market”. In short, the secondary market is where Fannie Mae, Freddie Mac, Wall Street and other mortgage investors ply their trade. They purchase loans that lenders make, then either hold them in their portfolios or bundle them with other loans into mortgage-backed securities that are traded in the same way as treasury securities and other bonds.

As a result, the bond markets indicate interest rate movement. Whenever economic news suggests an inflationary economy, investors demand higher yields from lenders because they don’t want to buy low-yield bonds now if the Federal rate hikes (designed to curb inflation) will make higher-yield bonds available later. The only way lenders can sell their loans in this environment is to raise the yields they offer investors. This increases the rates they charge consumers.

A similar change happens in reverse when the economy is degenerating. Investors demand bonds because they know the Federal Reserve will cut rates in the future (to stimulate the economy) and if they wait, they will be left with lower yielding bonds. Since investor demand is so strong, the lenders who control loan supply can offer lower yields. This results in lower rates for consumers.