Bond-market rout lifts mortgage cost
The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market. But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.
That’s the Catch-22 threatening to make an awful housing market potentially worse and keep the economy stuck in a funk. Kick-starting the economy requires higher spending, but rising rates mean fewer Americans will be able to refinance their home loans. And some potential buyers will be shut out of the market by higher monthly payments they won’t be able to afford.
Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported.
« If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity, » said economist Ed Yardeni, who runs his own investment firm. « Even worse, they could abort any necessary recovery in home sales and prices. » « The bond market is calling the Federal Reserve out, » said Mike Larson, a real estate analyst at Weiss Research Inc. « Investors are saying that the Fed can’t just print money out of thin air to finance a massive deficit. »