Treasury bond yields jump again; mortgage rates top 5.5%

The Treasury bond market just can't catch a break. Interest rates jumped again today after investors demanded a higher-than-expected yield at the government’s auction of $19 billion in 10-year notes.

This is more troubling news for the housing market, because mortgage rates take their cue from longer-term Treasury yields. Home loan rates surged again this week.

The new T-notes were sold at a yield of 3.99%. That wasn’t much above the 3.975% average expected by bond dealers surveyed by Bloomberg News, and there was ample bidding for the securities. But the market was hoping for a lower yield to signal that investors believed bond yields were peaking after their sharp advance of recent months.

Instead, "The yield rally is gaining new fuel every day," said Chris Rupkey, financial economist at Bank of Tokyo-Mitsubishi in New York.

At 3.99%, the yield on the new 10-year T-notes was up from 3.85% on Tuesday on previously issued 10-year notes, and is knocking on the door of 4%. The yield hasn’t been above 4% since Oct. 14.

The market may be drawing a line here: In trading at about 11:35 a.m. PDT, buyers were coming out of the woodwork, pushing the 10-year note down to 3.94%. The Treasury faces another test Thursday, when it will sell new 30-year bonds.

As chronicled ad nauseam by now, investors have been pushing up longer-term Treasury bond yields all year from what were generational lows. Some of the increase simply reflects that people are feeling better about the economy and are shifting money to other assets, including stocks and junk bonds. Investors are beginning to think about the possibility of the Federal Reserve tightening credit down the road, too.

But the jump in yields also is a function of the massive supply of new bonds as the U.S. borrows record sums to fund the bailouts of the economy and financial system.

At the same time, some of America’s foreign creditors are signaling that they’ve had their fill of Treasuries. Today, Russia’s central bank warned that it may reduce its holdings of U.S. bonds.

If it were only an issue of a higher interest bill for Uncle Sam, that might be manageable. But the rise in Treasury yields threatens to hammer down any housing market recovery by boosting mortgage rates. The average 30-year home loan rate hit 5.57% last week, up from 5.25% a week earlier, the Mortgage Bankers Assn. said today.

That’s shutting down the recent refinancing boom: The association’s index of mortgage refi activity dived again last week, the third straight weekly decline, and now is the lowest since mid-November.

-- Tom Petruno

Photo: The Treasury Building in Washington. Credit: Scott Robinson / Los Angeles Times

Comments

[Dave]

Do you think that there will be government intervention in the short term to drive mortgage rates / refinancing rates lower so that the housing upturn can be continued?

[Tom Petruno]

@Dave: Good question. The problem here is that the Federal Reserve already has been trying to manipulate mortgage rates (i.e., keep them down) via its purchases of mortgage-backed bonds and Treasury bonds over the last few months. Obviously, it isn't working: The market is bigger than the Fed, and the market has wanted to take rates up, for whatever reason or reasons. There is speculation that the Fed, at its June 24 meeting, will announce that it will increase purchases of mortgage securities. But the risk the Fed faces is that its credibility could be badly hurt if it buys even more securities, and rates continue to rise anyway.

See my column of last weekend here:

http://www.latimes.com/business/la-fi-petruno6-2009jun06,0,3556163.column?track=rss

And this Bloomberg story today:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aG8P1Rghr8OA

Tom Petruno

[Robb]

rise baby rise!!!! hahahha -

[George]

I just started looking at my first house 3 weeks ago and rates have climbed about 0.75% since then. Making the expected mortagage payment for a $325,000 about $200-250 higher per month. Despite my wife and I having very good incomes we are now considering waiting 1-2 years until we can afford the 20% down payment to avoid PMI.

[Barbara]

Would you recommend that I lock in now and then float down if they do go down after the 24th meeting? Is it too big of a gamble to wait?

[Chris HArdeman]

My broker continues to advise me on going with a FHA loan, putting down 3.5% and keeping my additional cash reserves. She is also speculating that rates will continue to rise. I hope her concern is sincere and this is not a sales tack-tick to close the loan - I feel like holding off buying because of rate increases but have to weigh that against the potential for getting a house at almost $.50 on the dollar. Potential payment has increased by $300 - $400 per month in the last two weeks... Any Advice???

[Josh]

@Barbara:

Somebody please answer this. I close in two weeks. Is it worth waiting or should I just suck it up and take what I can get now? Are we looking at a real reversal or a dead cat bounce?

[Tom Petruno]

@Barbara, Josh et al: We got some relief on rates today, as Treasury bond yields fell. Note this post:

http://latimesblogs.latimes.com/money_co/2009/06/the-latest-sell-off-in-treasury-bonds-may-have-peaked-as-the-steep-jump-in-yields-finally-has-lured-buyers-off-the-sidelines.html

[Tom Petruno]

More @ Barbara, Josh et al:

It's still a roll of the dice. I'm hearing a lot of bond traders say they think rates have peaked for now, but that doesn't mean they're going to fall substantially. They may just hang at these new, higher levels. That at least could mean that mortgage rates won't face more upward pressure.
The Federal Reserve meets on June 24. The big question is whether they're going to announce some new plan to try to pull home loan rates lower. There is no consensus on that on Wall Street right now.

Tom Petruno