Mortgage rates approach 5% as Fed tightens and inflation rattles bond markets

US mortgage rates neared 5% on Friday, the highest daily average in more than four years, as war-aggravated inflation fears spooked financial markets and the Federal Reserve ended a two-year emergency program that fueled demand for bonds containing mortgage loans.

The average locked-in rate for a 30-year fixed mortgage eligible to be backed by Fannie Mae and Freddie Mac, the most common form of home financing, rose to 4.87% on Friday, the highest since late 2018, after rising a third of a percentage. point in a week, according to data from Optimal Blue. The 30-year average jumbo rate rose to 4.4%, the highest since 2019.

Mortgage rates are rising after the Fed ended an asset purchase program this month that was aimed at keeping credit flowing during the pandemic. When demand for bonds weakens, investors can demand higher yields, pushing mortgage rates higher.

Inflation, which drives down returns on fixed assets, is also a factor, said Mark Goldman, senior loan officer at C2 Financial Corp. in San Diego.

Often, turmoil abroad causes global money managers to pile into the perceived safety of US bond markets, which can drive mortgage rates down, as happened during the Brexit crisis in the UK, he said. But because the Russian invasion of Ukraine has sent energy costs skyrocketing, it is having the opposite effect, as investors demand higher yields to offset inflationary pressures.

The new rise in fuel prices adds to inflation data earlier this month showing US prices were rising at the fastest rate in four decades after two years of supply chain bottlenecks caused by the COVID-19 pandemic.

“Inflation is the enemy of interest rates,” Goldman said. “When there is an expectation of higher inflation, interest rates go up.”

Perhaps foremost on the minds of bond investors, who influence lending rates by the yields they are willing to accept on mortgage-backed securities, is what the Fed’s next steps will be, he said.

“One of the big concerns is how quickly the Fed will unload its Treasury and mortgage bonds,” Goldman said. “They have this huge inventory of them, and the market is already trying to price in what it thinks may happen when the Fed starts selling those securities.”

For much of the past two years, the Federal Reserve bought $120 billion of bonds a month to stave off the kind of credit crunch that sank the economy in 2008.

Monthly purchases included $80 billion of Treasuries and $40 billion of so-called agency mortgage-backed securities — that is, bonds containing home loans backed by Fannie Mae, Freddie Mac and Ginnie Mae, the loan securitizer. supported by the Federal Housing Administration and the United States Department of Veterans Affairs.

Having the Federal Reserve as the bond market’s biggest buyer sent mortgage rates plummeting to new lows in 2020, fueling a housing boom that sent home prices soaring in 2021. the National Association of Realtors.

The nearly $6 trillion in bond purchases in the last two years sent the Fed balance sheet rising to record highs. The central bank now holds $8.5 trillion in securities, according to a statement last week, including $5.8 trillion in Treasuries and $2.7 trillion in mortgage-backed securities.

The pace the Fed sets for shrinking its balance sheet will influence 10-year Treasury yields, a benchmark for mortgage bond investors, as well as mortgage-backed security yields.

Details about the plan to sell assets will begin to emerge on April 6, when the policy-setting Federal Open Market Committee releases its minutes, Fed Chairman Jerome Powell said at a March 16 news conference. The reductions could start as soon as the next FOMC meeting, which will take place on May 3-4, he said.

“At our meeting that concluded today, the committee made good progress on a plan to reduce our security holdings and we look forward to announcing the start of the balance reduction at an upcoming meeting,” Powell said at the news conference. “In making interest rate and balance sheet decisions, we will take into account the broader context of the markets and the economy, and use our tools to support financial and macroeconomic stability.”

While Powell tried to reassure financial markets with promises of “stability,” the pace of mortgage rate increases has already outpaced the outlook of all major housing forecasters, including Fannie Mae, Freddie Mac, the National Association of Realtors Realtors and the Mortgage Bankers Association. . Friday’s four-year high in the average rate for a 30-year fixed conforming mortgage was 1.5 percentage points higher than the level seen earlier in the year, according to data from Optimal Blue.

While there is always uncertainty when predicting economic data points, including bond yields and mortgage ratesWe live in a time of added uncertainty due to the war in Ukraine, Powell said.

“The implications of the Russian invasion of Ukraine for the US economy are highly uncertain,” Powell said. “In addition to the direct effects of higher world oil and commodity prices, the invasion and related events may restrict economic activity abroad and further disrupt supply chains, leading to indirect effects on the economy. from the USA”

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