US Mortgage Rates Reached 12-Month Highs

Recently, some concerns appeared regarding the level of mortgage rates. Yesterday, Zillow recorded that this week, mortgage rates for 30-year fixed mortgages rose to 3.71% (up from 3.58% at this same time last week) and reached a 12-month highs. This movement occurred after ten-year Treasury bond rebounded above 2% amid speculation that the Federal Reserve could pull back on its bond-buying program before than expected. This idea was backed by Erin Lantz, director of Zillow Mortgage Marketplace:


“Rates spiked last week after meeting minutes revealed the Fed was contemplating scaling back economic stimulus plans much earlier than expected”


Remind that US central bank is buying $40B of MBS and $45B of Treasuries every month in an effort to reduce borrowing rates and that there is a strong correlation between the mortgage market and the US Treasury bond market. Indeed, holders of mortgage securities used to hedge the risk of declining MBS prices by selling US Treasuries.


Zillow data were confirmed by numbers which show a rebound in May of 30-fixed-mortgage-rates (almost 50 bp to 3.88%).



FT noted this sharp rise is also the result of a sell-off in the market for mortgage-backed securities as real estate investment trusts and portfolio managers had been active sellers. The article underlined that:


“MBS prices have tumbled to levels not seen in more than a year, and well below the level when the Fed began its latest round of purchases last September.”… “Further sharp falls on Tuesday sent the price of some recently issued MBS, which pay a coupon of 3 per cent, below a price of 101 of face value, down from a peak this year of nearly 105 in early May. The slide in price has eroded capital gains for investors, and added fuel to the sell-off. The most popular tranche of MBS, securities which pay a coupon of 3.5 per cent, have tumbled from a peak of almost 107 to below 104.”


Even if my view is that 10-year Treasury bond will not hit 2.40% before at least the end of the year (mainly because of moderate growth and low inflationary pressures) and will not push mortgage rates much higher, this move will affect immediately refinancing activity and then purchasing activity. Note that refinancing activity is already under pressure as Mike Fratantoni, MBA’s Vice President of Research and Economics said today:


“Refinance applications fell for the third straight week bringing the refinance index to its lowest level since December 2012 as mortgage rates increased to their highest level in a year”