Mortgage Rates React To Treasury Yields

The 30-year fixed mortgage rates finished last week averaging 5.29%, up nearly 0.3% from the final week of May. That jump was the largest single-week increase on such mortgages since last October when rates jumped .42%, driving rates to 6.46%. The current rates puts 30-year FRMs at a 25-week high.

The 15-year fixed mortgage rates did not fair much better, seeing rates increase an average of 0.26%. Rates on 15-year FRMs ended May averaging 4.53%, only to climb to 4.79% entering June. Average rates on ARMs followed suit, rising last week to 4.85%.

The Feds attempt at thawing the nation's housing and credit markets brought initial progress. Mortgage rates dropped to record lows during April, leading to a spike in new home and refinancing applications. In recent months, however, yields on Treasury notes have been on the rise as Washington is borrowing record amounts. Yields on Treasury bonds play a major role in setting interest rates on home loans. As volatility increases in the bond market due to confusion over the Feds next steps, along with the likelihood of buying up more debt, yields are likely to increase modestly.

Investors will be looking to see what news comes from the Treasury's next policy meeting at the end of this month. Keeping mortgage rates low is key, according to a number of economists and policy-makers, to improving the economy. If rates continue to climb it is hoped that home prices will at least begin to fall somewhat. Consumers must be able to make up the difference on growing interest rates from the lowered cost of a home. With more money in their pockets, consumers then have spending power to use elsewhere in the economy.

Though today's mortgage rates are higher than recent months, there are silver linings to be seen. As of the close of business last week, the all important gap between benchmark 10-year Treasury yields and 30-year FRMs was 1.77 percentage points. Moves by the Fed have lowered that gap from 3.37 percentage points at the end of December 2008. With that gap tightening it is suspected the recent rise in current mortgage rates is likely to slow or stay steady for now, at least as long as Treasury yields remain stable.