Yield Curve Inversions & Mortgages

The 30-year fixed-rate mortgage averaged 6.28%, up 4 basis points from a week ago and 66 BPS above the level a year ago, according to Freddie Mac’s latest survey of 125 mortgage-lending companies, thrifts and commercial banks.

The Mortgage Bankers Association’s February mortgage finance forecast has the 30-year averaging 6.3% this quarter, 10 BPS higher by midyear and at 6.5% throughout the second half of 2006.

Accordingly, all 100 panelists surveyed by Bankrate.com this week believe mortgage rates will rise over the next 35 to 45 days.

Climbing 8 BPS from last week, Freddie said the 15-year averaged 5.91%.

The 10-year Treasury note yielded 4.58% with a price of 99.31 at today’s close, worse than 4.56% and 99.50 at the close of trading a week earlier.

The 10-year Treasury-note yield, however, was lower than the yield on the two-year Treasury, which closed 4.69%. Some analysts believe the phenomenon, known as an inverted yield curve, signals an upcoming recession.

In his inaugural testimony to Congress this week as Federal Reserve Chairman, Ben S. Bernanke acknowledged that yields on 10-year nominal Treasury issues, at 4.5% at yearend, increased only slightly on balance over 2005 even as short-term rates rose 2 percentage points.

Restrained inflation expectations have been an important reason why long-term interest rates have remained relatively low, according to Bernanke’s testimony.

“As previous reports and testimonies from the Federal Reserve indicated, a decomposition of long-term nominal yields into spot and forward rates suggests that it is primarily the far-forward components that account for the low level of long rates,” he said. “The premiums that investors demand as compensation for the risk of unforeseen changes in real interest rates and inflation appear to have declined significantly over the past decade or so. Given the more stable macroeconomic climate in the United States and in the global economy since the mid-1980s, some decline in risk premiums is not surprising.”

Bernanke noted some sectors of the economy signal strength and that “although the outlook contains significant uncertainties, it is clear that substantial progress has been made in removing monetary policy accommodation.”

“As a consequence, in coming quarters the FOMC will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data,” he added.

The 5-year Treasury-indexed hybrid adjustable-rate mortgages reportedly averaged 5.95%, or 6 BPS more than a week earlier.

Freddie said the 1-year Treasury-indexed ARMs average edged up 2 BPS to 5.36% this week. The 1-year T-bill itself yielded 4.70% Wednesday, moving up 4 BPS from a week earlier.

The MBA sees the rate for 1-year ARMs staying at its current level until rising to 5.5% in the third quarter.

The volume of 1003s fell 7% from the prior week, reflecting an 8% drop in purchase money applications and a 7% downturn in refinance requests, according to the Mortgage Bankers Association’s application survey for the week ending Feb. 10.

The refinance share of mortgage activity slipped to 41%, MBA reported, while the ARM share remained 30%.