The question then becomes, what drives bond prices? There are two things that drive the price of any investment: 1) technical analysis of the investment (mortgage bonds in this case) and 2) the fundamentals of the investment. The technical analysis has to do with the outside factors that are influencing price movement.
Technical analysis of a specific mortgage bond is about a number of things including trends, moving averages, support and resistance levels, and the RSI - relative strength indicator, and support and resistance levels. Investors look to see if they think the bond has sold off to much too quickly in which case they may start buying. If many investors think there has been too much of a sell-off and start buying / investing in the bond, it drives the bond prices up. Usually the institutional investors are the first ones to start buying and their big dollars start moving the market. As little investors see the price moving up, they don't want to miss out on the opportunity so they jump in pushing the price up even further. As the price increases, the RSI rises and ultimately gets to the overbought threshold - this threshold may change if the market makes a significant move and breaks strongly through the resistance levels. At some point, the institutional investors are happy with their return and want to take the profits off the table; they don't always look for a big move since the dollar amount they are investing is so large that they can make a lot of money on small moves. Below is a snapshot of the charts I look at to try to determine what rates are going to do.
As the institutional investors start selling off they drive the prices down (and the interest rates begin to rise again). The smaller investors don't want to miss out on taking profits OR they get afraid that they are going to lose money as the price goes below what they bought it at so they sell as well driving the price down even further.
Fundamental analysis regarding bonds comes mostly from economic data (fundamental analysis of a company is about that company's numbers - gross revenues, profit, profit margin and such) as well as the experts' interpretation of the data. The bond market as a whole is greatly influenced by what is going on in the general economy; a strong or improving economy usually encourages investors to shift money out of the safe-haven investment of bonds and into more risky, but the potentially higher returns of equities (stocks). The idea is that if the economy is doing well, companies like Apple and Amazon will do well which will drive the stock price higher. When the economy is struggling, people will spend less which means lower profits for these companies and stock price deterioration because investors will sell off equities and move back into bonds - driving prices higher and interest rates lower. At a point where interest rates are significantly low, there is no real attraction for investors to buy bonds so sometimes the money is parked in cash. This is the cycle of investing.
Mortgage rates have been climbing for a couple of reasons: 1) Bernanke and the rest of his Fed cronies have been talking about tapering the Quantitative Easing program and ultimately ending it with a target of mid-2014, and 2) the economy is showing signs, albeit weak, of improvement. As noted above, money begins to shift from bonds to stocks as investors begin to believe that the economy is gaining its footing. I expect mortgage rates to trend up for a while because of improving economic data and because the upward price pressure on bonds due to the Fed's monthly purchase will be going away which will allow the bond prices to come down and necessarily push interest rates higher.
If you want the best opportunity to get the best interest rate, it is important to work with a loan officer who 1) understands what moves interest rates, and 2) has real-time access to the mortgage bond market so that they can see the trends and be ready to move at a moment's notice, sometimes before rates change even though the bond market has made a significant move.
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