Current Mortgage Rates Likely To Follow Yields

Treasury yields continued their drop last week. Yields on benchmark 10-year Treasuries fell from 3.86% midweek to 3.80% to close out the week. Treasury yields at one point on Thursday, prior to the Fed's sale of the bonds, climbed as high as 4.01%. Mortgage rates should stabilize and drop slightly by the end of the week.

Lower yields on mortgage securities is another factor helping to stabilize and lower mortgage rates. Monday saw a third straight day of dropping yields. Fannie Mae saw rates in their 30-year fixed-rate bonds fall from 4.91% to 4.72% near the end of business on Monday.

Differences between the company's bonds and 10-year Treasury yields fell to 1%. This difference, a key forecast indicator of future changes in mortgage rates, was as low as 0.7% in May. The difference had climbed to nearly 2.4% last year.

Predictions for falling home prices are another factor to be considered. A number of economists and real estate experts estimate the market will experience a fall in home prices of 40% from their peak. With higher mortgage rates lower home prices will be necessary to offset those finance costs to buyers. Builders nationwide are continuing to scale back construction as worries of surplus continue to plague the industry.

The U.S. Treasury will hold another policy meeting next Tuesday. Current mortgage rates will likely be what holds for the remainder of this week. The Federal Reserve has been committed to the continued purchase of Treasuries to keep borrowing rates low for consumers. However, some economists are worried the Fed's efforts to keep mortgage rates low and boost the housing market will lead to inflation. World markets will be watching to see what the Treasury announces next week.

By Kyle Godfrey