Why interest rates for mortgages and Treasuries increased in 2013

Market Realist

Do mortgage rates follow movements in Treasury yields? (Part 6 of 9)

(Continued from Part 5)

Interest rates

As we mentioned in the previous part of this series, the 30-year conventional mortgage rate increased 113 basis points (or bps) to 4.48% by December 26, 2013, compared to 3.35% on December 28, 2012. Though mortgage rates had increased, the housing market proved resilient. The NAHB/Wells Fargo (WFC) Housing Market Index rose from 41 in April 2013 to 57 by the end of the year, indicating an increase in housing activity.

Some of the factors buoying home purchases (XHB) were:

  1. Increasing demand for home loans as eligible buyers scrambled to take advantage of the low interest rate environment
  2. Strong GDP growth in the last three quarters of 2013
  3. Increases in non-farm payrolls of ~2.3 million between December 2012 and December 2013

Treasury rates were affected by expectations that the economy was recovering and by the onset of the Fed’s tapering program in December 2013, when the monthly bond buying program was reduced by $10 billion, to $75 billion. Tapering of bond purchases would reduce market liquidity and raise interest rates. Daily market yields for 10-Year Treasury Notes (IEF) recorded a year-over-year increase of 126 basis points in 2013. Daily market yields for 30-Year Treasury Bonds recorded a year-over-year increase of 101 basis points in 2013.

To find out why bonds have rallied in 2014, read on to Part 7 of this series.

Continue to Part 7

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