Houston's Rate Sheet

Rates: Still going!

This has been a slow news week, but rates are still on the rise. According to Bankrate.com, long-term mortgage rates have risen to their highest levels since July 2002. In their national survey of large lenders, Bankrate.com found that the benchmark 30-year fixed-rate mortgage rose 7 basis points to 6.51 percent. Here's Holden Lewis', Bankrate's resident mortgage rate guru, explanation for the continuing rise in rates and an education about the yield curve.

Rates and bond yields continued to rise, partly as fallout from last week's rate policy meeting of the Federal Reserve. The Fed raised the target federal funds rate a quarter of a point on March 28 and implied that at least one more rate hike is forthcoming.

Such an increase in short-term rates doesn't always translate into an increase in long-term rates. In fact, sometimes short-term and long-term rates move in opposite directions. In the last few weeks, though, a phenomenon known as the "flat yield curve" has caused short-term and long-term rates to move in the same direction and by roughly the same amount.

The stone-and-mattress curve
"Flat yield curve" is a term that economists use. We ordinary mortals can picture the concept as a stone under a mattress.

The yield curve describes the difference among the yields on bonds of different lengths. Think of that difference as the thickness of a cushion. The cushion has gotten much thinner in the past year. Explaining the same phenomenon, economists and bond traders would say that the yield curve is flatter.

Take the two-year and 10-year Treasury notes. They make a good example because 30-year, fixed-rate mortgage rates tend to move roughly in concert with 10-year Treasury yields, while two-year Treasuries are more sensitive to Fed rate policy.

A year ago, the two-year Treasury yielded 3.75 percent and the 10-year, 4.48 percent. You could say that the cushion between the two was 73 basis points thick. On Wednesday morning, the two-year Treasury yielded 4.81 percent and the 10-year, 4.85 percent. The cushion had worn down to a paper-thin 4 basis points.

There's hardly any cushion between two-year and 10-year Treasury yields. In this laughably tortured metaphor, a rise in short-term yields is like a pebble under the mattress -- the long-term bond feels it immediately and rises accordingly.

posted by Vincent Biondillo @ 3:14 PM