Twists in bond market drive key rate to 5-month high

AP News
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Posted: May 12, 2015 4:43 PM
Twists in bond market drive key rate to 5-month high

NEW YORK (AP) — A key borrowing rate shot to a five-month high Tuesday, as traders around the world continued to sell big government bonds.

The drop in price for the 10-year Treasury drove its yield up to 2.36 percent in early trading Tuesday, the highest level since late November. The jump in the 10-year Treasury rate means homebuyers, corporations and local governments will likely have to pay a little bit more to borrow money.

But the sudden turn in the U.S. bond market has little to do with U.S. economic trends. The selling started last month in Europe, according to traders, and has since spilled into U.S. markets.

"What's really going on is an overseas market is hitting the U.S. market," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia. "It's not about inflation or economic growth in the U.S."

Worried about the strength of the global economy, nervous investors crowded into government bond markets in Germany and the U.S. earlier this year, pushing prices up and rates down.

In the middle of April, the 10-year U.S. Treasury yield sank as low as 1.86 percent, according to FactSet data. The 10-year German bund paid much less, yielding as little as 0.07 percent.

What happened next has left many in the markets scratching their heads. Plenty of traders decided they owned too many German government bonds and decided to sell. One explanation is that big investors figured a successful bet on European government debt had run its course. Some bonds rose so high that they carried a negative yield. Instead of getting an interest payment, traders were paying borrowers to take their money.

"Why on earth would someone buy a negative yielding bond?" LeBas asked. "The reason, of course, is that you expect somebody else to buy it off you."

Whatever the cause, the shift came so fast that it forced banks to raise cash through selling Treasury bonds, traders said. And that, in turn, helped send U.S. long-term interest rates up.

"If you're selling bonds to somebody else they have to free up cash," said Edward Acton, Treasury strategist at RBS Securities, in Stamford, Connecticut. "Selling begets selling. It's a snowball effect."

What's it mean to most Americans? Incredibly cheap mortgages aren't quite as cheap. The 10-year rate acts like an anchor for borrowing costs throughout the economy, and its plunge in recent years sliced mortgage rates nearly in half, knocking them to the lowest levels since banks started making long-term mortgages in the 1950s.

In November 2012, the 30-year mortgage rate hit a record low of 3.31 percent. A decade ago, the average rate was 5.9 percent.

The bond market's recent drop has turned that trend in the opposite direction, nudging mortgage rates up. Over the past three months, the average 30-year mortgage has climbed from 3.59 percent to 3.80 percent, according to Freddie Mac. That's an additional $12 a month for every $100,000 in mortgage debt.