[Update 1: Clarifies Sterne Agee analyst]

A surge in Fannie Mae, Freddie Mac and Ginne Mae agency mortgage bonds the last week of January may be what’s driving down the cost of mortgages this week.

As Sterne Agee analyst Henry Coffey notes agency bond values are being boosted by falling long term Treasury rates, driving down the cost of mortgages. According to Interactive Data, Treasurys trading edged down in price at the open following positive economic data from the Eurozone. That trend reversed on negative sentiment on the nation's economic recovery endured.

Nonetheless, favorable market conditions persist, which should bode well for the bonds in the near term.

“The expected gains in agency bond values and related boost in book values should show up in the March period, if treasury rates remain low and bond values hold at current levels,” Coffey wrote.

“Since the end of the September quarter, the rate on 10-year treasury bonds moved up 40 bps. Since the end of December the rate on the 10 year is down 37 bps. While not a perfect indicator of trends in agency backed mortgage backed security values trends in long term treasuries are indicative of trends in agency MBS values.”

Gabe Medrano, regional sales executive NexBank says he thinks that while the rally in agency bonds is part of the reason the cost of mortgages is staying low, he thinks there is another component at play.

“One reason is the rally, but I think the larger part is the (Qualified Mortgage) rule,” Medrano said. “The scrutiny of fees is a huge component.”

“No one has been sued over QM yet and no one wants to be the first, so I think everyone is being very conservative,” he said. “QM went into effect Jan. 10 and it took a little while for the effect to be felt.”