Mortgage rates have been motoring along at near-record lows for weeks. Those favorable rates might soon dwindle in the rear-view mirror.
The benchmark 30-year fixed-rate mortgage rose four basis points this week, to 5.11 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.41 discount and origination points. One year ago, the mortgage index was 5.19 percent; four weeks ago, it was 5.15 percent.
The benchmark 15-year fixed-rate mortgage rose two basis points, to 4.47 percent. The benchmark 5/1 adjustable-rate mortgage rose three basis points, to 4.49 percent.
When gathering interest rates, timing is everything, just as it is in comedy. And what happened to mortgages Wednesday afternoon was no laughing matter. Bond yields and interest rates went up sharply. It happened after Bankrate had gathered much of the day's rate data, so the benchmark rates probably didn't capture the full impact of the day's increase.
Weekly national mortgage survey
Results of Bankrate.com's March 24, 2010, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
|30-year fixed||15-year fixed||5-year ARM|
|This week's rate:||5.11%||4.47%||4.49%|
|Change from last week:||+0.04||+0.02||+0.03|
|Change from last week:||+$4.05||+$1.68||+$2.94|
The rise in yields appears to reflect an influx of new corporate and government debt to bond markets. When a lot of institutions want to borrow in the bond market at the same time, yields rise.
One trend didn't change: The gap between mortgage rates and 10-year Treasury yields got smaller. The 30-year mortgage rose four basis points in Bankrate's survey compared with the week before, but the 10-year Treasury's yield rose 18 basis points over the same period.
In the lingo of investors and economists, the spread has been narrowing between mortgage rates and Treasury yields. This week, the gap is 1.28 percentage points; a year ago, it was 2.38 percentage points, and two years ago, the spread was 2.46 percentage points.
Spread between 10-year Treasury and 30-year mortgage
This year's narrow spreads are unexpected. Some view them as somewhat ominous. If spreads were to bounce back to where they were a year ago, mortgage rates would be close to 6.5 percent. No one expects spreads to widen that much anytime soon. But market-watchers would feel more secure if they knew exactly why spreads are so narrow.
Many mortgage professionals believe spreads are narrow because there's a lot of cash sloshing around in the global financial system. "That cash is yield-hungry," says Bob Walters, chief economist for Quicken Loans. In other words, investors are looking for bonds that deliver high yields without compromising safety.
"When the world contracted, and became completely risk averse, everybody piled into what they perceived as the least risky assets," Walters says. "Treasuries are certainly one of those, and mortgages are one of those, especially after the government has backed Fannie (Mae) and Freddie (Mac)."
The Treasury has pledged to absorb up to $200 billion in losses each from Fannie and Freddie. That makes mortgage-backed securities virtually as safe as Treasuries. "From a credit perspective, the government has made mortgage-backed securities essentially equal to Treasuries," Walters says -- so there's no longer much difference in their yields.
David Adamo, president of Luxury Mortgage, a lender based in Stamford, Conn., sees merit in the widely held theory that Walters describes. Even though the Federal Reserve plans to stop buying mortgage-backed securities in the next week, the government's backing will keep rates down, he says.