Interest rates soar on jobs data, putting housing at risk

The Treasury bond market is in cardiac arrest today over the May employment report: Yields are soaring, dealing another blow to investors who’ve been hiding out in government bonds -- and threatening another big jump in mortgage rates.

If rising home loan rates price more buyers out of the market, sellers will have to respond by cutting asking prices. Anyone have a better idea?

The 10-year T-note yield has surged to 3.84% from 3.71% on Thursday. The 2-year T-note has rocketed to 1.25% from 0.96%. Yields now are the highest since mid-November.

Older bonds issued at lower rates lose value with every tick higher in market yields.

The net drop of 345,000 jobs last month was far smaller than the 520,000 that analysts, on average, had expected. Even though the unemployment rate rose to 9.4% from 8.9% in April because more people decided to look for work, many Treasury bond investors see the smaller job-loss figure as a sure sign that the recession is nearing its end.

And that raises the question of how soon the Federal Reserve will be forced to begin pulling back from its unprecedented easy-money policy.

The vast, vast majority of economists don’t believe the Fed would dare to tighten credit anytime soon. But bond traders reserve the right to be neurotic about the possibility.

In any case, with another huge auction of Treasury issues slated for next week, an upbeat employment report was the last thing the beleaguered bond market needed.

And by extension, it was the last thing the mortgage market needed: The average 30-year home loan rate rose above 5% this week for the first time since mid-March, underpinned by higher Treasury yields. Freddie Mac’s average loan rate jumped to 5.29% from 4.91% the previous week.

The May employment data offer real hope for an economic rebound. But can we have a lasting recovery if the housing market isn’t part of it?

-- Tom Petruno

Photo: A sign that applies as much to the Treasury bond market lately as to the housing market. Credit: Justin Sullivan / Getty Images

Comments

[Smi2le]

"...If rising home loan rates price more buyers out of the market, sellers will have to respond by cutting asking prices...."

Exactly! So instead of putting your money in a house which is declining in value, put it in CDs which are now paying good interest, and wait until house prices hit bottom. Then you will have even more money, and plenty of time to make a good deal.

[rob]

This is yet another reason this country needs serious energy conservation measures, mandated by the Federal government and applicable to everyone. Since we ship billions of dollars overseas to support our cheap oil habit, the dollar is chronically anemic and interest rates get a goose.

And don't think drilling in the US will help. Our reserves are pitiful, especially when you consider our profligate consumption.

The best alternatives are further laws boosting automobile mileage, higher energy taxes, and forced conservation.

[JS]

One can only defy gravity for so long, then you face the inevitable SPLAT.

[Piotr Orloff]

It would probably do a lot of good if interest rates went up a percent or two. Keeping them this low for so long is only going to create more long term problems amongst those who borrow. If borrowing remains cheap then the risk of profligacy rises.

[john milner]

Yes I have a better idea.

Buy a bulldozer and bulldoze the excess housing.

[DocinPA]

You are incorrect about this. Interest rates are starting to go through the roof (as is the price of gasoline) because of the devaluation of the dollar due to "quantitative easing". The Bond Vigilantes are daring Bernake and Turbo Tax Cheat Timmy to keep printing money and we are all getting punished accordingly. This is only the start. Long term rates are NOT under the control of the Fed. We are going to either see the dollar completely collapse or watch long term interest rates go up a LOT. Recovery? What recovery?

[mr.bilko]

That's the way it's supposed to work. Interest rates go down, selling prices go up, monthly payment remains the same. Interest rates go up, selling prices drop, monthly payment remains the same. The exception were the bubble years of 2002 to 2007 where the monthly mortgage payment skyrocketed.

Anyone who follows the bond markets knows that the yield (interest rate) and bond prices move in opposite directions. Higher yields (interest rates) means lower bond prices. Lower yields (interest rates) means higher prices. Housing prices work (except for 2002-2007) on the same principle.

[Joseph....The Real Estate Guy.]

I totally agree.

"Rates go up, home prices go down"

[Cybrwalker]

Doc is correct. The increase in interest rates is not because of a "healthy"
economy. Check out what happened in Germany...where they burned
worthless marks. World wide hyperinflation is starting its run. Can it be controlled? No. World wide unemployment is staggering (Spain is nearly 18%, etc.) which should keep prices low....it is not. The dollar might be
wiped out for the Amero...a currency for Canada, US, and Mexico. This is
the goal of the private Federal Reserve and the wealthy families like the
Rothschilds when THEY set this up in 1916.

[Randy Dauley]

Only on Wall Street would they refer to the May unemployment report of a 345,000 job loss as upbeat. The primary reason the rate of job losses has slowed is that there are far less jobs to eliminate in many industries that have not been eliminated already. The true unemployment rate including the under employed and those that gave up seeking jobs is not 9.4% but over 16%. That is hardly upbeat. Also remember that even when job losses stabilize, employers will not start re-hiring until demand picks up from consumers. Consumers are unlikely to spend more until they feel secure about their jobs and the future. In summary, this recession can go on several more years and interest rates will go through the roof as we keep printing money and devaluing the already worthless dollar.