THE BASIS POINT

WeeklyBasis 06/05/07: Insight on the 10yr Treasury and Its Affect on Rates

Fixed and ARM rates are up about .30% since mid-May, bringing mortgages to their highest levels so far in 2007. To figure out why rates are rising and get perspective on rate markets, we can look at the yield on the 10yr Treasury, which today is at 4.97%. The low point for 2007 was 4.49% in mid-March. This steep .48% upswing reflects a rapid change in the outlook for the economy and interest rates. The market was betting a weak housing sector would slow the rest of the economy, but strong corporate earnings, job/wage growth, and manufacturing have actually caused investors to worry that the Fed might actually hike rates to moderate growth and inflation.

I see this as unlikely because the weak housing market will still offset other areas of economic strength. First, because April’s existing home sales were down 2.6%, the lowest in four years, and existing home prices were down 0.8% from a year ago – this was after 2 months of rates being at their lowest point in a year. And second, because the current rate spike will likely put a further drag on housing activity.

So we come back to Treasury yields for some perspective on this summer. Since mid-2002, the yield on the 10-year Treasury yield has stayed reliably below 5%, except for a four-month span in Spring-Summer 2006 when it hit 5.25%. Seems this is happening again this year, so while most of the market panics about higher rates, smart buyers can exploit this to get lower purchase prices – then refi on the next rate dip. Like I said, the math generally proves this point on a per-property basis.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.5% (6.64% APR)
10/1 ARM: 6.75% (6.89% APR)
5/1 ARM: 6.5% (6.65% APR)

Jumbo ($417,001 – $650,000) – NO POINTS
30 Year: 6.75% (6.89% APR)
10/1 ARM: 6.75% (6.89% APR)
5/1 ARM: 6.5% (6.65% APR)