The bubble in the mortgage markets finally blew up this week.  After holding and holding, while the 10 yr note rate climbed, mortgage rates jumped to levels not seen in several months. Many analysts have been warning that the mortgage markets couldn’t hold on forever while treasury rates increased. Mortgage lenders became complacent with hedging risk, believing apparently that the $1.25T the Fed committed to buy, would keep mortgage rates from increasing.  It is finally hitting home that the Fed has a serious problem; the problem is how to keep mortgage rates down, the housing markets are the key to any economic recovery and one of the keys to getting the housing sector back on track is keeping mortgage rates affordable and low. It was widely thought that buying $1.25T of MBSs would do it. Not the case; we all know about the massive supply Treasury has to sell in the debt markets, as we have noted it is unlikely that can happen (raising $200B a month along the yield curve, not including T-bills under 1 yr) without higher rates and the potential of creating inflation fears.

Without lower mortgage rates the economy isn’t going to recover at the pace recent thoughts had developed. If housing and home prices are not stabilized there isn’t going to be much of a recovery based on the timeframe markets had been expecting. 

The market had been looking for a solid showing and while this was less impressive than the 2-yrs, that was also expected. The market had been looking for a draw of 2.33% plus and liked the lower yield. More Treasury borrowing tomorrow; $26B of 7 yr notes will complete this week’s $101B of borrowing. Markets will have two weeks to breathe before Treasury comes back with 3 yr, 10 yr and 30 yr bond auctions on June 9, 10, and 11. With this mornings jobless claims at 8:30 expected to be up 5K; and April durable goods orders (+0.5%). At 10:00 Apr new home sales are expected to be up 1.8%. The selling today adds to the technically oversold markets. 

Mortgage rates cannot stand against the increase in long term treasury rates. The spread between the 10 yr note and 30 yr mortgages came back in line two weeks ago as we reported, back to about 165 basis point from a high of 270 basis point six months ago.

BOTTOM LINE…if you are a home buyer looking to purchase in the bay area, your window of opportunity to get a super low rate may be closing, so act now.  If you are a home owner and have not refinanced into the low rates we have seen , you will want to act now!