Features of the main financial sectors of the economy are deeply interlinked. When you look at the figures for one type of activity in the economy, it may be affected by another and directly influence yet another piece of data in turn. So it is with Employment and jobs data and the influence they have on mortgage lending rates.
Once a month the Department of Labor’s number crunchers, the Bureau of Labor Statistics, (BLS) releases the change in employment levels from the previous month. The securities markets and banks watch this closely because it is a leading indicator of how the economy is behaving. It basically means, whichever the way employment changes, other financial indicators will fall like dominoes in a line.
The Significance Of Employment And Jobs Data
The BLS monthly employment numbers affect Federal government treasury bonds, treasuries affect all other bond markets, and mortgage bonds included. The change in value of mortgage bonds or mortgage-backed securities directly influences the market value of mortgages to investors and that causes the rates on offer for home loans to change. In this way employment and jobs data has a direct cause and effect linkage with mortgage lending rates.
When Jobs Increase What Happens?
Higher jobs tend to lead to higher interest rates. That means that the bonds behind the market that are composed of mortgage backed securities, are going to be less valuable. This is bad for the markets generally as the income from bonds is actually constant once the paper is written. The only way for them to have a higher interest rate is to discount the value of the bonds. It also means that if you are holding an adjustable rate mortgage that is due to reset after such an interest rate hike your payment will increase.
Guess What Happens When Jobs Are Lost
The opposite is true that if the fed reports decreased employment, it will cause interest rates to fall as investors rush to buy treasuries as a safe form in which to hold their assets. This ripples through the markets as all bonds reduce their interest rates in turn. The interest offered on new home loans will be lower and any pending changes to adjustable rates will be less severe, if they change at all.
The path by which employment and jobs data impacts mortgage rates is not a direct one. The impact of the change in employment levels is felt most keenly in the market for debt of the Federal government or treasuries. This debt is considered the safest investment and because the price of other bonds is competitive they set their prices relative to treasuries. Treasuries have a strong influence on the price of all other groups of bonds.
One group of these is mortgage-backed securities, bonds created from bundled home loans. The changes in mortgage backed securities directly impacts the price of new loans and so interest rates charged on new home loans change in response to the change in employment.