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Mortgage rates skyrocket on Inflation and Bond Insurance Concerns

In a typical market, bad economic growth news usually forces mortgage rates down. However, this is not a typical market. Last week, despite a less than positive Retail Sales report and a dreary outlook given by Fed Chairman Ben Bernanke, mortgage rates rose rather significantly. The reasons for the rising interest rates lead back to two concerns: bond insurance and inflation.

Investors are having some very serious concerns regarding the health of the nation's bond insurers. Bond insurance is a service whereby holders of a bond pay a premium to a insurer. The insurer will reimburse interest and capital repayments to these bondholders if the debt holder defaults on repayment of the bond. Not surprisingly, the bond insurance industry's troubles have been caused by the high default rates in the mortgage industry. As mortgage default rates rise, it has become apparent that these bond insurers do not have the capital reserves to meet their obligations. Because bond insurance has typically had the effect of lowering the risk of bonds and thereby reducing the price, it has helped to push down yields and interest rates. However, investors are now pricing bond as if there were no bond insurance at all, which is beginning to move interest rates higher than historic levels.

As for inflation, prices remain a big concern for mortgage investors. On Friday, import/export prices report, a rarely followed metric, showed a substantial increase in the import price index. Import prices have rose 1.7 percent in January, pushing the year-on-year rate to 13.7 percent, which is the largest increase in 25 years. Since, inflation eats into the interest paid on bonds, this news pushed rates even higher.

Mortgage rates moved up across the board. According the Bankrate.com’s overnight average, the 30-year fixed rate mortgage averaged 5.81 percent, up 26 basis points from last week’s 5.55 percent. The 15-year fixed rate mortgage came in at 5.24 percent, up from last Monday’s 5.04 percent. Short-term rates were a little bit more stable on the week. The 5-year Adjustable rate Mortgage (ARM) rose only 2 basis points to 5.0 percent.

As stated before, the Consumer Price Index (CPI) will be released this week. CPI measures the average price of goods purchased by US consumers. It is the most widely followed inflation report of the month. This week’s report could have a big impact on mortgage rates, as investors try to anticipate the Federal Reserve’s next move.

Besides the CPI report, the calendar will be rather slow this week. The markets are closed on Monday in observance of President’s Day. On Wednesday, the Housing Starts report will provide us with some insight into the health of the nation’s homebuilders. And on Tuesday and Friday, voting members of the FOMC board will give speeches on the state of the US economy. All of these events could have a positive or negative impact on mortgage rates. It continues to be a very volatile market, and borrowers should lock in rates as soon as possible.

posted by Vincent Biondillo @ 3:53 PM