Treasury yields drop lower, mortgage rates follow
June 12, 2009 by admin
The Treasury bond market has been under extreme pressure over the past three weeks and anxious investors and economists were anxious to see the results of three government bond auctions this week. The early results are good for the Treasury market and great for long term fixed rate mortgage loans which finally have pulled backed from their sharp climb up. The Federal reserve held three auctions this week that help to reassure nervous investors that despite the rapid climbing rate of debt that the government is adding to its deficit their was enough demand for bonds to help bring yields lower.
Most investors closely follow the yield on the ten year bond as this often best reflects the direction that long term mortgage rates for thirty and fifteen year loans are heading. Treasury yields dropped dramatically earlier this year as investors pulled out of the stock market in record waves and looked to invest in bonds, believing these to be safer investment vehicles. The yield on the ten year treasury bond dropped to as low as 2.26% in March, before beginning to move higher in lockstep with the stock market. The yield on the ten year bond reached a high point of 4% this past week, which created a large amount of anxiety in the marketplace. On Friday, yields on the ten year treasury dropped below 3.8% and now appear to be in trading in a channel between 3.75% and 4%. The sharp rise in the yield can be attributed directly to the fear that the U.S. debt load has climbed at a pace that is certain to result in significant inflationary pressure in the future. The impact on inflation with investing in bonds directly impacts the way a bond instrument is priced. If investors are concerned that inflation will grow in the future, it diminishes the value of their current investment, requiring them to seek a higher rate of return to help insure their profitability.
The pullback with treasury yields to end the week should help to drop long term mortgage rates by as much as .25%. Fixed rate mortgage loans have jumped over 100 basis points in the last month and were fast approaching the six percent level for thirty year loan terms. The pullback with bonds, should help to position long term rates in the mid to high five percent range heading into next week. The housing market is significantly impacted when long term fixed rate mortgage loans move higher. A one percent increase in rates on a two hundred thousand dollar mortgage equates to a payment that is $120 higher per month and $43,200 worth of additional interest for the life of the mortgage loan. Rates in the low to mid five range are very close to historical lows and help provide great incentive for buyers to continue to purchase and finance new homes. The drop with the yields should also benefit jumbo mortgage loans, which are available in the mid to high six percent range with most national lenders, but are much more difficult to qualify into and many lenders have simply stopped issuing these mortgages entirely as they are not eligible for resale to Fannie Mae, Freddie Mac or the FHA. Investors and economists will closely follow the rise of oil prices as this could have damaging consequences on bonds and be a factor in creating rates to increase.