Bond Yields Up, Will Mortgage Rates Follow?

Mortgage rates may soon be nudging back up from the ultra-low levels they have been occupying for the past six weeks, after yields on 10-year bonds rose following today's announcements by the Federal Reserve.

The Fed basically announced that it plans no new actions following the April meeting of its Open Market Committee, disappointing bond investors who had hoped it would purchase additional Treasury securities or take similar action to hold down interest rates. As a result, prices dropped and yields rose on Treasury bonds across the board, with the yield on the key 10-year bond hitting 3.12 percent, its highest since November.

Since the 10-year bond is closely tied to mortgage interest rates, that means the latter may soon be rising out of the sub- 5 percent range where they have held since the last Fed meeting in mid-March, at least temporarily.

The Fed did report that it detected hopeful signs in the economy since the March meeting, although these largely consisted of conditions declining more slowly than before. Even so, the news buoyed the stock market, with the Dow Jones gaining nearly 170 points.

The Dow's rise came despite news out of the Commerce Department earlier today that the Gross Domestic Product had shrunk a considerably worse-than-expected 6.1 percent in the first quarter of the year. Forecasts had predicted a decline of only 4.7 percent. Unless revised by forthcoming data, the 6.1 percent decline would mean the economy continued to contract nearly as fast as in the last quarter of 2008, when it shrank by an annual rate of 6.3 percent.

A more comprehensive report on the first quarter GDP will be released at the end of May.

The Federal Reserve reported that it appears that inflationary pressures will for some time remain below optimal levels needed to promote optimal economic growth. It said it will therefore "employ all available tools to promote economic recovery and to preserve price stability," including maintaining the key federal funds rate in the zero to quarter point range for the foreseeable future.