Mortgage Rates Rise on Higher Bond Yields

Mortgage rates edged higher this week, as inflationary fears drove up the cost of borrowing despite the Federal Reserve's ongoing efforts to keep interest rates down.

Major mortgage rate surveys reported significant increases this week, with Wednesday's Bankrate.com survey reporting a big jump of 21 basis points on 30-year fixed mortgages, to 5.45 percent (1 basis point = 0.01 percent). The other surveys reported more modest increases, with Thursday's Freddie Mac survey reporting average 30-year rates of 4.91 percent, up from 4.82 percent the week before, and the Mortgage Bankers Association reporting an increase to 4.81 percent from 4.69 percent for the week ending May 22.

The Bankrate.com survey typically runs higher than the other two due to differences in the way they collect and report data.

Inflationary fears had pushed up yields on long-term bonds, to which mortgage rates are tied. As investors become concerned about inflation eroding the value of their investments down the road, they tend to be willing to pay less for long-term bonds and demand higher returns to balance out the risk.

Inflation a concern

Inflationary fears have been stirring for some time and on Wednesday, they popped, driving rates on 10-year bonds up sharply, reaching as high as 3.73 percent, up from 3.49 percent the day before. The 10-year bond is closely associated with 30-year fixed mortgages, which rose accordingly - a single-day snapshot by the mortgage data firm HSH Associates had 30-year rates increasing to 5.29 percent on Wednesday from 5.03 percent the day before.

Bonds head back down

But as quickly as they rose, concerns cooled on Thursday, and 10-year bonds headed back down again, going as low as 3.58 percent before closing the day at 3.67 percent. Analysts said the retreat was due in large part to a successful sale of $26 billion in 7-year bonds that day by the Treasury Department; apparently many investors had been dumping 10-year bonds in anticipation the sale would attract only modest interest, due to concerns the government is issuing too much debt in an effort to stimulate the economy. When demand for the 7-year bonds proved greater than expected, yields dropped and prices rose on 10-year notes as well.

Investors remain skittish

It remains to be seen how this will play out for mortgage rates in the near term. Many analysts expect that the opportunity to capitalize on the very lowest rates has passed, though rates continue to remain unusually low in historic terms. However, many investors are clearly skittish about the long-term impacts of the government's fiscal stimulus efforts, and it may not take much for them to start bidding up rates again if they see inflationary pressures building.