As Treasury yields continue their upward trajectory, reaching levels not seen since November 2023, the impact on the U.S. mortgage market and potentially for the broader economy is becoming increasingly pressing.
On Wednesday, the yield on the 30-year Treasury note climbed 5 basis points, reaching 4.78% by mid-morning in New York, on track to close at its highest level since Nov. 6, 2023.
Yields on the 10-year benchmark bond also creeped higher to 4.65%, broadly matching the 4.66% hit earlier this month which corresponds with the highest level in five months.
As such, the performance of bond-related ETFs has been sharply negative year-to-date, with the iShares 20+ Year Treasury Bond ETF TLT down nearly 10%.
Mortgage Market Feel The Heat
The rising yields have directly influenced the mortgage sector, where rates have surged to their highest levels since late 2023.
Joel Kan, the vice president and deputy chief economist at the Mortgage Bankers Association (MBA), noted that the 30-year fixed mortgage rate escalated to 7.24%, marking a third consecutive weekly rise.
This upswing in rates is cooling mortgage application activity, with the Market Composite Index showing a 2.7% decrease in loan applications.
Kan explained that purchase applications declined, as home buyers delayed their purchase decisions due to strained affordability and low supply.
Federal Deficit Concerns
The burgeoning federal deficit continues to stir unease among investors and market analysts.
Veteran investor Ed Yardeni expressed concerns about the growing deficit, saying, “The federal deficit is getting bigger and bigger devouring more and more funds in the capital markets. It hasn’t killed anyone yet but it might one day if investors decide they don’t want to keep feeding it. The resulting back up in bond yields could kill the economy and lots of investors.”
These comments highlight the tension between government funding needs and the market's capacity to absorb new debt without destabilizing effects.
“The vertical ascent in the net interest paid by the US federal government is alarming and certainly confirms that the federal debt blob is out of control,” Yardeni stated.
He suggests adopting a more cautious stance toward the bond and stock markets if a future auction that receives a poor response confirms investor reluctance to continue supporting the burgeoning federal debt.
New Uptrend Well On Track, Watch For Major Golden Cross
From a technical standpoint, the monthly chart for 30-year Treasury yields shows a clear ascending channel, connecting the March 2020 and January 2021 higher lows with the October 2022 and October 2023 higher highs.
This channel has effectively generated a significant shift from the long-term bearish trend that began in the late 1980s.
This trend suggests a robust upward momentum that could see yields testing several resistance levels in the near future, including the psychological thresholds at 5% and higher.
Traders should be particularly focused on the potential formation of a ‘golden cross’ between the 60-month and 120-month moving averages, corresponding to 5 and 10-year averages, respectively.
Key resistances to watch are represented by 5% (psychological), 5.38% (June 2007 highs), 6% psychological and 6.74% (January 2000 highs).
Therefore, although yields approaching 5% on longer-dated Treasuries might appear appealing to investors, there remains a possibility for these yields to climb even higher, thus leading to negative returns in bonds.
Read now: US Economy Expected To Grow 2.5% In Q1: Not ‘A Hard Landing And Hardly A Soft One’
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