Treasury bond yields jump again; mortgage rates top 5.5%

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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