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Mortgage rates tend to rise and fall along with 10-year Treasury yields, as both are influenced by investor activity in the bond market.
Bing Guan / Bloomberg
Mortgage rates have risen this week from their all-time low. Buyers and homeowners who want to refinance should not expect them to back down.
Bond yields, which have risen steadily since mid-August, with hopes of further stimulus and optimism that the economy will recover once a vaccine is distributed, rose rapidly in the new year, with a Treasury yield of 10 reference years rising 22 basis points (hundredths of a percentage point) to close at 1.15% this week.
This could be an indicator that ultralight mortgage rates, which generally move with the ten-year Treasury yield, have reached their end point. Mortgage rates rose this week to 2.79% from 2.65% the previous week.
Freddie Mac
reported Thursday. “As Treasury yields have risen, it’s pushing mortgage rates up,” said Sam Khater, chief economist at Freddie Mac.
Mortgage rates tend to rise and fall along with 10-year Treasury yields, as both are influenced by investor activity in the bond market. Both mortgage rates and Treasury yields fell to new lows or near historic lows during the pandemic, with a fixed rate at 30 years on average of 2.83% in the last six months, according to Freddie Mac, and the 10-year Treasury an average yield of 0.78%, according to data from the Governing Board of the Federal Reserve System.
Although both fell during the pandemic, the gap between 10-year Treasury yields and 30-year fixed rates widened beyond their usual range as a booming refinancing market overwhelmed lenders, which caused mortgage rates to fall less than yields. As a result, mortgage rates continued to fall even after yields began to rise in August.
If Treasury yields continue to rise, mortgage rates are likely to reach historic lows. “The absolute minimum of mortgage rates is likely to be over,” Lawrence Yun, chief economist at the National Association of Realtors, said in an email to De Barron. “Expect a slight boost in mortgage rates in the coming months.”
If the spreads between ten-year and mortgage rates remain at their current range, the mortgage rate is likely to rise to about 3.5% by the end of 2021, said Joel Kan, associate vice president of economic forecasts and industry of the Mortgage Bankers Association, in an interview with De Barron. While an increase in the mortgage rate would likely temper some demand for refinancing, Kan says he doesn’t expect the rate hike to affect the home buying market.
While rising Treasury yields put more pressure on mortgage rates, there is no guarantee that the two will move slowly, Keith Gumbinger, vice president of mortgage website HSH.com, wrote in De Barron. “Mortgage lenders are full of profits and therefore can absorb part of the increase for a while in order to maintain business flow.” Federal Reserve purchases with mortgages, which help maintain liquidity in the market in times of crisis, also play an important role, he said.
Even if mortgage rates rise this year, they still have a long way to go before they reach historic highs. “While mortgage rates are expected to increase modestly in 2021, they will remain unquestionably low, supporting the demand of home buyers and leading to continued refinancing activity,” Khater wrote of Freddie Mac in a statement. Freddie Mac expects the 30-year fixed rate mortgage to average 2.9% in 2021 and 3.2% in 2022, according to the organization’s quarterly forecast.
According to data from Freddie Mac, the average 30-year fixed mortgage rate dating back to 1971 is 7.90%. In the last decade, the average rate was 3.93%. The highest average rate recorded by Freddie Mac was 18.63% in early October 1981.
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