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The influence of the bond market on the home mortgage rates depends on the bond yields. Note that when the bond yield drops, there is a dip in the mortgage rate also. However, if the yield increases, the mortgage rates also rise up.
The volatility of the bond market depends on the prices of the bond and the rate of interest. The shape of the yield curve over a period of time indicates the dynamic nature of the bond market. Note that the actual price of a bond is different from the bond yield value. When the bond price increases, the yield decreases and vice versa. This looks quite confusing at the beginning.
Let us take an example to understand this concept. Let us say that a buyer purchases a bond worth $100 with a coupon rate (interest) of 5 percent. If after a year, the interest rate rises to 6 percent for the same bond worth $100, then the buyers would not purchase a bond from a previous bond owner, who holds with an interest rate of 5 percent only. This is because bonds have a fixed interest rate at the time of purchase. Hence, in case a bond owner wants to sell at this time, he should offer a discount to attract buyers.
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