US mortgage rates leap ahead

US mortgage rates soared last week amid a sharp rise in Treasury market yields, as investors started to bet that inflation pressures could prompt the Federal Reserve to raise interest rates later this year.

The sell-off pushed rates on 30-year fixed-rate mortgages to an 11-week high of 6.02 per cent, up from 5.81 per cent a week earlier, according to Bankrate.com. Meanwhile, the so-called “jumbo” mortgages – or those for loans above $417,000 – rose to 7.21 per cent from 7.05 per cent.

This means that the borrowing rates on many home loans in expensive areas, such as California, Florida and New York, are now running at heights last seen in mid-April – or just before the government-backed mortgage financiers Fannie Mae and Freddie Mac began buying jumbo loans, in an attempt to support the market.

The surge in mortgage rates will make it more expensive to buy homes and less likely that existing homeowners will be able to refinance mortgages. That, in turn, is likely to damp hopes of an early recovery in the US housing market.

Frank Nothaft, chief economist at Freddie Mac, said: “Market inflation expectations increased over the last few weeks and the federal funds futures market now has a 25 basis point rate hike priced in by the end of the year.”

Last week long term Treasury yields reached their highest levels since late December. The yield on the 30-year Treasury recently touched 4.8 per cent, up from 4.10 per cent in mid-March, while the yield on the 10-year note has risen above 4 per cent, up from a low around 3.30 per cent in March.

Kevin Flanagan, fixed-income strategist at Morgan Stanley, said long-term yields could rise further over the summer if the headline inflation rate continued to increase. “Higher long-term bond yields start to elevate the cost of your classic 30-year mortgage,” said Mr Flanagan.

These rising long-term yields are likely to force owners of mortgage portfolios to rebalance them by selling mortgages or treasuries. However such hedging activity could push rates higher, exacerbating the trend.

Analysts at Barclays Capital said interest paid on new mortgage-backed securities had increased by 50 basis points in the past few weeks, and the market was beginning to display signs of such portfolio rebalancing.