And the Interest rates jump
May 28 (Bloomberg) — A jump in interest rates on typical new U.S. mortgages to the highest since February may end a “two-month-old rebound in risk appetite,” according to Credit Suisse Group analysts.
Rates on 30-year loans climbed 0.37 percentage point to 5.34 percent yesterday, the New York-based analysts, who included Mahesh Swaminathan, wrote in a report today. That’s because yields rose on so-called agency home-loan bonds as investors backed away from the debt and U.S. Treasuries sold off, partly because of mortgage-bond hedging that may continue, they said.
“If not reversed, the spike in mortgage rates has the potential to derail the two-month-old rebound in risk appetite by negatively affecting not just the consumer, but also financial institutions that are relying on elevated mortgage origination for earnings,” they wrote.
The Federal Reserve, seeking to use lower home-loan rates to stem the housing slump and bolster consumers, said in March it would increase its planned purchases of agency mortgage bonds guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae by $750 billion, to as much as $1.25 trillion, and start buying government notes. Amid optimism the global recession is easing and banks are healing, the Standard & Poor’s 500 stock index has climbed 32 percent from March 9 through yesterday, as prices of bonds aside from Treasuries have soared.
Today, yields on Washington-based Fannie Mae’s current- coupon 30-year fixed-rate mortgage bonds fell 0.07 percentage point from a six-month high to 4.62 percent as of 9:59 a.m. in New York, data compiled by Bloomberg show.
Threatening a Rally
Higher mortgage rates also may “squelch” a rally among the almost $2 trillion of non-agency U.S. home-loan bonds, by reducing prepayment expectations and “risk appetite,” according to the Credit Suisse analysts. Refinancing has boosted the value of many of those securities by returning some of the principal of bonds trading below face value at a faster pace.
Higher refinancing contributed to $9.15 billion of mortgage-banking profit at 21 top lenders during the first quarter, according to newsletter Inside Mortgage Profitability. Charlotte, North Carolina-based Bank of America Corp. reported a $4.25 billion first-quarter profit as mortgage production surged to $85 billion from $22 billion a year earlier. Origination profits totaled $1.6 billion, helping to make up for higher provisions for bad loans.
