Are mortgage rates really going to jump this year?

At the start of each of the last two or three years we have been warned that mortgage rates were likely to increase, possibly sharply, in the coming year. Last year, when the Fed announced that it was thinking of ending its purchase of mortgage-backed securities, there was indeed a sharp jump, but since then rates have dropped back again.

So far this year the yield on the US 10 year Treasury, the main determinant of the 30 year fixed rate mortgage, has dropped from 3% to 2.5% and mortgage rates have followed, with the rate reaching 4.12% in Freddie Mac’s latest weekly survey. The same geopolitical factors (that would be Russia’s expansionist activities) that have sparked renewed buying of US Treasuries are also restraining economic growth in Europe. There are no signs of renewed inflationary pressures.

Against that background, the yield of 2.5% on 10 year Treasuries compares favourably with that in Germany, 1.4%,or Japan, 0.6%, with only the UK at 2.6% offering a comparable return.

While it is hard to see the reason for mortgage rates to rise, it is also worth bearing in mind that we remain very close to all-time lows. I am including a chart of rates over the last year together with one going back to 1971. (more…)