Don't Be Lulled by 14 Basis Point Average Monthly Change in Rates.

Between April 1971 and June 2003, what was the size of the typical monthly change, in basis points, of the average 30-year, U.S. fixed-rate mortgage?

Our colleagues at Yahoo Finance recently asked that question of Internet surfers.

The options given were 7 basis points, 14 basis points, 28 basis points, 42 basis points or 56 basis points.

The correct answer, according to data provided by Freddie Mac, is 14 basis points, on the conservative end of the spectrum of choices offered. Interestingly, 28% of Yahoo's responders guessed right - suggesting that many consumers have followed mortgage rates closely enough to make an educated guess. The most popular answer, however, was 7 basis points, which was the choice of 43% of Yahoo's responders.

Be that as it may, what can portfolio managers learn from this broad historical data?

Obviously, the long-term average can be misleading to anyone trying to hedge a portfolio. As Yahoo noted, there were some months during the past three decades when rate swings were much more dramatic. In the 1980s, when average mortgage rates reached a peak of 18.45%, there were times when rates moved by more than 150 basis points in a single month. Of course, mortgage companies didn't have to worry as much back then about how those swings would affect the value of their mortgage servicing rights, since MSRs from loans they originated themselves were usually not on the books.

But these days, accounting for MSRs is a big issue, and so protecting the value of those portfolios is more important than ever.