Investors continue to have little appetite for Treasury bonds, and that's a problem for home buyers and people hoping to refinance their mortgages.
Home loan rates have jumped since early December and may be headed higher still in the near term if they keep following the Treasury market's lead.
The 10-year T-note yield, a benchmark for mortgages, rose to 3.74% on Tuesday, up from 3.68% on Monday and the highest since Aug. 10. The yield has surged from 3.2% on Nov. 30.
Last week, mortgage-finance giant Freddie Mac said the average U.S. rate for 30-year home loans climbed to 4.94% from 4.81% the previous week and 4.71% two weeks earlier.
The mortgage average still is well below its recent peak of 5.6% in mid-June. Still, rising rates could halt the momentum in home sales, or force home prices down. "That's the question -- how much can the housing market handle?" said William Larkin, a bond portfolio manager at Cabot Money Management in Salem, Mass.
Wall Street's standard answer for why longer-term Treasury yields have surged: belief in a continuing economic recovery in 2010, and with it the potential for higher inflation and tighter credit.
That is encouraging some investors to sell low-risk bonds and buy stocks as they square their books for 2009. The Standard & Poor's 500 index hit a fresh 14-month high Tuesday, closing at 1,118.02.
Not everyone buys the idea of a sustained recovery, of course. But there are other factors pushing Treasury yields up across the board. One is that another huge sale of bonds looms next week. The Treasury is expected to sell $44 billion in two-year notes, $42 billion in five-year notes and $32 billion in seven-year notes to raise cash to finance the budget deficit.
Treasury yields often rise ahead of auctions as the market adjusts to whatever levels are needed to make sure the bonds sell. With many investors and traders certain to be gone next week for the holidays, demand is expected to be weak. The auctions "should prove challenging . . . to say the least," said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Conn.
Another problem for Treasuries: In thinly traded year-end markets, "momentum" traders can easily take control by piling on, exaggerating the prevailing trend -- in this case, higher yields.
For now, with few people likely to be shopping for a home or looking to refinance a loan during the holidays, the effect of the bump in mortgage rates may be muted.
The big test will come with the turn of the calendar: Come January, will investors figure that long-term Treasury yields are high enough to be attractive again -- or still too low to compensate for the risks to bonds from a bona fide economic rebound?