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

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U.S. mortgage rates approached 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 program of inflation. two-year emergency that spurred demand for bonds containing home loans.

The average locked-in rate for a 30-year fixed mortgage eligible to be guaranteed 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 by 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 this month ended an asset-purchase program that aimed to maintain credit during the pandemic. When demand for bonds declines, investors may demand higher yields, which puts upward pressure on mortgage rates.

Inflation, which eats away at fixed asset returns, is also a factor, said Mark Goldman, head of loans at C2 Financial Corp. in San Diego.

Frequently, unrest overseas causes global fund managers to pile into the perceived safety of US bond markets, which can drive down mortgage rates – as happened during the Brexit crisis in the UK. United, he said. But, because Russia’s invasion of Ukraine has caused energy costs to skyrocket, it has the opposite effect as investors demand higher returns to offset inflationary pressures.

The new fuel price spike adds to inflation data from earlier this month, showing U.S. prices were rising at the fastest pace in four decades after two years of power chain bottlenecks. supply caused by the covid-19 pandemic.

“Inflation is the enemy of interest rates,” Goldman said. “When higher inflation is expected, interest rates rise.”

The Fed’s next steps are perhaps the most important in the minds of bond investors, who influence lending rates based on the returns they are willing to accept for mortgage-backed securities, he said. -he declares.

“One of the big concerns is how quickly the Fed will unload its mortgage and Treasury bonds,” Goldman said. “They have this huge inventory of them, and the market is already trying to gauge what they think might happen when the Fed starts selling those stocks.”

For much of the past two years, the Fed has been buying $120 billion in bonds a month to stave off the kind of credit crunch that sank the economy in 2008.

The monthly purchases included $80 billion in Treasury bills and $40 billion in agency mortgage-backed securities – that is, bonds containing home loans backed by Fannie Mae, Freddie Mac and Ginnie Mae, the securitizer of loans guaranteed by the Federal Housing Administration and the United States Department of Veterans Affairs.

The Fed being the biggest buyer in the bond market drove mortgage rates to new lows in 2020, fueling a housing boom that sent house prices soaring in 2021. The median price of a home previously owned jumped 17% last year, the biggest annual gain on record, according to the National Association of Realtors.

The nearly $6 trillion in bond purchases over the past two years have pushed the Fed’s balance sheet to record highs. The central bank now holds $8.5 trillion in securities, according to a statement released last week, including $5.8 trillion in Treasury bills and $2.7 trillion in mortgage-backed securities.

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

Details on the asset sale plan will begin to emerge on April 6, when the federal open market committee releases its minutes, Fed Chairman Jerome Powell told a news conference. March 16. The cuts could begin as soon as the next FOMC meeting, which is May 3-4, he said.

“At our meeting which ended today, the committee made good progress on a plan to reduce our securities holdings, and we expect to announce the start of the balance sheet reduction at a future meeting.” , Powell said at the press conference. “In making decisions on interest rates and the balance sheet, we will consider the broader context of markets and the economy, and we will use our tools to support financial and macroeconomic stability.”

As Powell sought to reassure financial markets with promises of “stability,” the pace of mortgage rate increases has already exceeded the outlook of all major housing forecasters, including Fannie Mae, Freddie Mac, the National Association of Realtors and the Mortgage Bankers Association. . According to data from Optimal Blue, Friday’s four-year high for the average 30-year conforming fixed mortgage rate was 1.5 percentage points higher than at the start of the year.

While there is always uncertainty when forecasting economic data points, including bond yields and mortgage rates, we live in times of additional uncertainty due to the war in Ukraine, Powell said.

“The implications of Russia’s invasion of Ukraine for the US economy are highly uncertain,” Powell said. “In addition to the direct effects of rising global oil and commodity prices, the invasion and related events could restrict overseas economic activity and further disrupt supply chains, with on the American economy.