Well, it was only a matter of time before the Feds attempts to keep interest rates low would backfire on them. Spurred by a sharp sell off in the long term US Treasuries market, interest rates rose over a full 1% this week but ended their rise just over 5%.
Mortgage rates closely mirror long-term bond yields. Since home mortgages are long-term debts, it makes sense that they would follow closely to the movements of long-term debt security instruments such as the 10 year US Treasury bond. Remember, the interest being paid on the mortgage by the borrower is an expected return that the investor (lender) is seeking in exchange for lending the borrower the principal loan amount. If the investor (lender) thinks that there is an increased risk for future inflation (increased inflation devalues long term investments) then the investor will require an increased expected return to counteract the effects of the inflation risk – this causes mortgage rates to increase.
This week we saw the market get caught in the dilemma of the current economic recession which the government has tried to end by spending. But that same government spending requires taking on more government debt, i.e. continued issuing of additional US Treasury Bonds, which now requires higher yields (expected returns) to attract new buyers. During mid-day Wednesday, bond yields broke out to higher levels, meaning bond prices started crashing, concerning equity traders to the point they started selling even further increasing bond yields.
Overall, the yields on bonds, and therefore mortgages, have come back down to Earth today, but this may mark the beginning of the end for the 4% 30 year fixed rate mortgage. Of course, considering where interest rates have been in the past – flashback to 1981 when we saw them reach 18% - if a homeowner is able to lock-in a mortgage rate in the 5% range they should consider themselves very lucky.
