Mortgage Bond Rally May End Soon

An article in BusinessWeek today discusses how mortgage bonds are expected to fall as the Federal Reserve stops buying the $1.25 trillion mortgage-backed securities by March, driving up interest rates on new home loans.

According to analysts, the extra yield over benchmark rates that investors demand to hold securities will widen as much as half a percentage point as the Fed stops purchasing. So far, the Federal Reserve’s program has helped reduce yields, which guide lending rates, by about one percentage point. 

As the yields rise, loan rates are likely to increase 0.75 percentage points higher by the end of 2010. This may add to the challenges of the housing market as it tries to recover from the economic slump. Mortgage rates continued to rise again during the past week, with the average rate on 30-year fixed-rate mortgages going above 5%, according to Freddie Mac’s weekly survey of mortgage rates. 

The 30-year fixed-rate mortgage averaged 5.14% for the week ended Thursday, up from last week’s 5.05% average and 5.1% a year ago. Rates on 15-year fixed-rate mortgages were 4.54%, up from 4.45% last week but lower than 4.83% a year earlier. Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 4.44%, up from last week’s 4.4% but down from 5.57% a year earlier. One-year Treasury-indexed ARMs were 4.33%, down from 4.38% and 4.85%, respectively.