Mortgage rates rise following an early spike in Treasury yields

Mortgage rates increased by 8 basis points for the week ended March 25, most likely reflecting a spike in the benchmark 10-year Treasury yield at the start of the period.

Freddie Mac's Primary Mortgage Market Survey pegged the 30-year fixed rate mortgage at an average of 3.17% for the week, up from 3.09% one week prior.

While rates were up on average as of Thursday morning, there was some fluctuation earlier in the week.
Zillow's tracker had the rate on the morning of March 25 at 2.98%, down 7 bps from the previous week's average of 3.05%. But nearly all that downward movement occurred in the last few days, a Zillow.com graph indicated.

A third tracker from Black Knight Optimal Blue has the 30-year FRM rising from 3.342% on Monday (less than 1 bp lower than where it was on March 18) to 3.283% on Wednesday.

International risks drove Treasury yields down at one point as investors increased their purchases of U.S. bonds, Matthew Speakman, an economist with Zillow, explained in a research note issued Wednesday night.

"An abrupt change to Turkey's central bank leadership introduced new risk to financial markets, and some European countries' re-imposition of lockdowns to combat surges in COVID-19 cases introduced some doubt about the viability of the global economy’s recovery efforts," Speakman said.

After news of the turmoil in Turkey broke, the 10-year fell nearly 12 bps between March 22 and March 24 to 1.61%.

Speakman is bearish on the prospects for further declines in Treasury yields — and therefore mortgage rates.

"While the pullback in rates was a welcome reprieve from the persistent increases over the past couple months, it's unclear how long it will last. In the past several weeks, there have been more than a few occasions in which rates have paused their upward movement only to quickly resume it," Speakman said.

"With the U.S. economy continuing to show signs of improvement, upward pressure on rates is sure to remain,” he added.

While strong home purchase demand continues, the higher rates are having an impact on the market.

"Since January, mortgage rates have increased half a percentage point from historic lows and home prices have risen, leaving potential homebuyers with less purchasing power," Sam Khater, Freddie Mac chief economist said in a press release. "Unfortunately, this has disproportionately affected the low end of the market, where supply is the slimmest."

This week's Freddie Mac PMMS also found that the average for the 15-year FRM increased by 5 bps week-over-week to 2.45%. The 5-year Treasury-indexed hybrid adjustable rate mortgage also was up 5 bps last week at 2.84%.

For the same week in 2020, the 30-year FRM was 3.5%, the 15-year FRM was 2.92% and 5-year Treasury hybrid ARM was 3.34%.

Mortgage rates have not increased as fast as Treasury yields.

Rates increased by 42 bps from the start of the year to a week ago. In comparison, the 10-year Treasury yield rose 70 bps, Bose George, an analyst with Keefe, Bruyette & Woods said in a report.

"Since mortgage-backed securities spreads have tightened only modestly since year-end, that implies that primary/secondary spreads have narrowed by roughly 30 bps and are now approaching their historical averages," George noted. "This suggests that mortgage profitability on a per-loan basis should see a fairly meaningful decline starting in the second quarter, even though mortgage volumes are likely to remain robust this year."

Originations are on track to total $3.2 trillion in volume this year, down from an estimated $3.8 trillion last year, according to the Mortgage Bankers Association.

There are now 11.1 million high quality refinance candidates based on this week's increase in the PMMS, which is the fewest in exactly a year, according to Black Knight report.

Black Knight defines refi candidates as 30-year mortgage holders with a maximum 80% loan-to-value ratio and credit scores of 720 or higher who could shave at least 0.75% off their current first lien loan.

Overall, 19 million 30-year FRM borrowers have current loans 75 bps above Thursday’s rate.

Refinance activity is projected to drop to $1.5 trillion in 2021 from $2.4 trillion last year as purchase volume rises to $1.7 trillion from $1.4 trillion.

Lower volume combined with elevated head counts and competition among mortgage lenders are what will lead to pressure on gain-on-sale margins, George said.

"We believe that this backdrop is likely to culminate over time in lenders accepting sub-optimal margins to support higher levels of volume," George said. "We believe that competitive pressures from ambitious market share growth objectives could also contribute to gain-on-sale margins falling below historical averages."