Mortgage Rates Rising as US Treasuries Stop Buying Mortgage Securities
A recent article highlighted that the Federal Reserve’s decision to stop buying mortgage loan securities (MBS) should cause an increase in mortgage rates. But that won’t be the only thing driving up long-term interest rates: the Treasury’s trouble going forward in selling debt will also contribute to higher mortgage rates, according to a Morgan Stanley economist. According to Bloomberg, Yields on benchmark 10-year notes will climb about 40% to 5.5%, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgage loans to 7.5% to 8%, almost the highest in a decade, Greenlaw said.
These are very high mortgage rates -and much higher than we’re used to seeing over the past several years. They should cut significantly into the demand for refinancing and even new home purchases. Mortgage rates like that could also worsen the foreclosures crisis, as many adjustable rate mortgage loans (ARMs) have benefited from historically low interest rates. Once they adjust to near, or over, double-digits, many more homeowners with ARMs will be force to fold. The cause of this increase in home mortgage rates comes from what this economist believes will be a higher yield demanded for government Treasury securities. Those are generally considered risk-free rates, so any mortgage bearing a similar long-term coupon will consist of its default risk premium added to that risk-free rate. FHA guidelines are tightening and most conforming and jumbo loan programs have seen requirements increase for income documentation.
Bloomberg explains that the government debt will become more expensive because of both supply and demand: The U.S. will face increased competition from other debt issuers, spurring investors to demand higher yields as the Federal Reserve ends a $1.6 trillion asset-purchase program, according to James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley. The central bank was the largest purchaser of Treasuries in 2009 through a $300 billion buyback of the securities completed in October. The Treasury will sell a record $2.55 trillion of notes and bonds in 2010, an increase of about $700 billion, or 38%, from this year, Morgan Stanley estimates. Caron says total dollar-denominated debt issuance will rise by $2.2 trillion in the next year as corporate and municipal debt sales climb. So in addition to the pressure that I mentioned earlier stemming from the Fed’s departure from the MBS market, the broader investment community will likely drive rates higher on long-term debt as well. While bad news for the housing market, this is probably good news for sensible investing.
0 comments
Leave a comment
Read more
« Federal Reserve Hints that Mortgage Rates Will Remain Low
Mortgage Rates Inch Up »
Recent Comments