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Mortgage Rates Tracking Bonds' Climb

September 04, 1987|Associated Press

NEW YORK — The jump in interest rates in credit markets to levels not seen since early 1986 is expected to show up soon in home mortgages. Already, mortgage rates are climbing.

Bond interest rates have rocketed on fears that a weaker dollar will mean higher inflation and waning foreign demand for U.S. securities.

The yield on the bellwether 30-year Treasury bond, considered the most sensitive to interest rate speculation, reached its highest rate since early 1986 Wednesday at 9.46% and fell slightly Thursday to 9.44%; it was 27% late Tuesday and 9.16% late Monday.

The yields are about half a point higher than in mid-August and more than two points higher than in January, when the 30-year bond yielded an average 7.39%.

Because billions of dollars in mortgages are traded like government and corporate bonds, mortgage rates in recent years have become increasingly tied to the bond market.

Fixed-rate mortgages averaged 10.33% at the end of last week, up from 10.3% the previous week and a low of 9.1% in late March, according to a survey by the Federal Home Loan Mortgage Corp.

'Real Problem'

Rates are expected to rise more sharply in coming days as lenders complete adjustments based on the recent changes in the credit markets.

"The potential is not that bond rates will just jump up, but that they will continue to rise over a longer period of time. That's going to be a real problem for housing," said John Tuccillo, chief economist for the Washington-based National Assn. of Realtors.

The interest rate scenario is similar to what happened this spring when inflation worries caused the dollar to decline in foreign exchange, leading to a bond market slump that pushed interest rates sharply higher.

That pushed mortgage rates to a peak of 10.8% in May, causing new home sales to slump 12.3% lower during the month.

But Tuccillo said the rate hikes now could be longer lasting because they are tied to worries about the dollar and the nation's trade performance, which will not fade as quickly as inflation fears based on volatile commodity prices.

Dollar's Effect

Several analysts said the recent interest rate gains marked the latest phase of a yearlong trend that will mean further increases in a variety of lending rates.

Interest rates generally have moved higher much of the year on signs of higher inflation and stronger economic growth, which increases demand for credit and thus interest rates.

But the recent slump in the dollar has triggered the sharpest rate jumps yet.

The dollar has fallen since last month's report of a bigger than expected U.S. trade deficit in June--a record $15.7-billion shortfall. The dollar bought 140.45 Japanese yen Thursday in Tokyo, down 7.6% from its Aug. 14 closing in New York.

A weak dollar, which makes U.S. products cheaper overseas and raises the cost of imports, was the key tool in the Reagan Administration's attempts to shrink the trade deficit. Failure of the strategy to yield results has raised speculation that the government will seek further declines in the dollar.

But the markets and the Federal Reserve believe too weak a dollar could ignite high inflation, which diminishes the value of fixed-income investments such as bonds while discouraging foreign investment, which has been a key source of financing for the huge U.S. budget deficit.

Triggering Event

That worry has sparked a selloff of bonds on speculation of further declines in the dollar and weakening foreign demand for U.S. bonds in the coming months.

"The reality of the big trade deficit and the need to finance it was brought home to people when that number came out," said Gordon Pye, senior vice president of Irving Trust Co. "It was a triggering event, not at all out of line with what was underlying at the time."

When the dollar plunged earlier this year, the Fed tightened credit slightly, pushing interest rates higher to help attract dollar buyers and stem the currency's decline.

Many analysts believe that the Fed will take similar steps this time, which will raise short-term interest rates. That in turn is likely to prompt banks to raise their prime lending rate, currently 8.25%, which is based on how much banks must pay for short-term credit.

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