Morgage Rates Could Be Heading For 7.5% To 8%

Posted By on December 27, 2009

If this happens, it will kill what ever bottoming action we’ve seen in real estate, crush commercial real estate and put the economy back in recession…….Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

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Morgan Stanley Sees 5.5% Note as Geithner Confronts Deficits

By Oliver Biggadike and Daniel Kruger

Dec. 28 (Bloomberg) — If Morgan Stanley is right, the best sale of U.S. Treasuries for 2010 may be the short sale.

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

Investors are demanding higher returns on government debt, boosting rates this month by the most since January, on concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion. Rising borrowing costs risk jeopardizing a recovery from a plunge in the residential mortgage market that led to the worst global recession in six decades.

“When you take these kinds of aggressive policy actions to prevent a depression, you have to clean up after yourself, Greenlaw said in a telephone interview. Market signals will ultimately spur some policy action but I’m not naive enough to think it will be a very pleasant environment.

Yields on the 3.375 percent notes maturing in November 2019 climbed 27 basis points, or 0.27 percentage point, to 3.8 percent last week, according to BGCantor Market Data. The price fell 2 5/32 to 96 1/2. They’ve risen 61 basis points this month, the most since a jump of 63 basis points in January as government efforts to unfreeze global credit markets lessened the appeal of the securities as a haven.

The U.S. will face increased competition from other debt issuers, spurring investors to demand higher yields as the Federal Reserve ends a $1.6 trillion asset-purchase program, according to James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley. The central bank was the largest purchaser of Treasuries in 2009 through a $300 billion buyback of the securities completed in October.

The Treasury will sell a record $2.55 trillion of notes and bonds in 2010, an increase of about $700 billion, or 38 percent, from this year, Morgan Stanley estimates. Caron says total dollar-denominated debt issuance will rise by $2.2 trillion in the next 12 months as corporate and municipal debt sales climb.

Mortgage rates last reached 7.5 percent in 2000 as productivity gains slowed after the demise of some Internet companies. The average rate on a typical 30-year fixed-rate mortgage climbed to 5.05 percent in the week ended Dec. 24, according to McLean, Virginia-based Freddie Mac.

Yields on mortgage securities issued by Fannie Mae rose to a four-month high of 4.54 percent last week. Fannie and Freddie securities are used to guide borrowing costs on almost all new U.S. home lending.

Higher borrowing costs as the U.S. shows signs of beginning to emerge from the longest economic contraction since the 1930s puts Treasury Secretary Timothy Geithner in a situation similar to one faced by his predecessor Robert Rubin.

“This is the re-emergence of the bond market vigilantes, said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion. The vigilantes are saying, OK guys you want to do this, you’re going to pay a higher price for it.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiGQrHp46pc4&pos=2

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