Rates on traditional fixed-rate mortgages saw their largest one-week increase in more than 20 years this week, shooting back well above 6 percent on continued volatility in markets for investments such as Treasurys and bonds that finance mortgages.

Rates for 30-year fixed-rate mortgages hit at an eight-week high, averaging 6.46 percent with an average 0.6 point for the week ending Oct. 16, Freddie Mac said in its weekly Primary Mortgage Market Survey.

That compares with 5.94 percent a week ago and 6.4 percent a year ago. The 52-basis-point increase in the average rate for a 30-year fixed-rate mortgage was the largest weekly increase since April 1987, when it rose 84 basis points, Freddie Mac said.

The 15-year fixed-rate mortgage jumped 51 basis points from a week ago, averaging 6.14 percent with an average 0.6 point, up from 5.63 percent last week and 6.08 percent a year ago.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) also jumped back above 6 percent, averaging 6.14 percent with an average 0.6 point. That’s up from 5.9 percent last week and 6.11 percent a year ago.

Only one-year Treasury-indexed ARMs were relatively immune from the market turmoil, averaging 5.16 percent with an average 0.6 point. That compares with 5.15 percent last week and 5.76 percent a year ago.

ARM rates tend to be based on shorter-term benchmarks and showed smaller gains in part because of the Federal Reserve’s emergency cut in the overnight lending rate on Oct. 8, said Frank Nothaft, Freddie Mac chief economist.

Some experts say mortgage rates are tracking rising yields on Treasurys, which could be headed up because of the government’s plans to issue up to $700 billion in new debt to recapitlize banks and buy up toxic assets like mortgage-backed securities. When the supply of Treasurys is greater than demand, the price of purchasing them goes down and their yields go up.

The government conducted an unplanned sale of $40 billion 10-year Treasury notes last week and plans to sell $60 billion of short-term bills this week, the Wall Street Journal reported.

But the exaggerated spread between Treasury yields and the interest rate on bonds that finance mortgages and the debt of Fannie Mae and Freddie Mac also continues to grow — perhaps as an unintended consequence of the government’s rescue plan.

Thanks to new government gaurantees of bank debt, Fannie and Freddie now face more competition when they sell their securities, which have traditionally been seen as a safe haven by investors, CNNMoney reports.

The Bush administration this week ordered the Federal Deposit Insurance Corp. to begin insuring loans between banks, and to provide full coverage of non-interest-bearing accounts such as business payroll accounts above the current $250,000 limit. The Treasury Department on Sept. 19 created a program to guarantee existing money market deposits for one year, and the Federal Reserve will begin buying commercial paper — short-term debt issued by businesses — beginning Oct. 27 (see Inman News story).

In the long term, some observers think that while Treasury yields will inevitably rise as the government issues more debt, mortgage rates will stabilize if confidence in credit markets is restored and the spread between Treasurys and mortgage rates shrinks back closer to historical norms.


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