[quote=5yearwaiter]Bob, How mortgage rates spike happens if Bernanke pull out the Fed feeding to treasuries?. I know I am not up to your level of guess interms of bond market etc – so this question.[/quote]
Thats a good question, so let me try to explain it as best I can.
Yields on 10-year and 30-year Treasury securities are typically used to set long-term mortgage rates. Loans with short initial terms (1-, 3-, and 5- year ARMs are used for shorter-term securities.) So when bond yields drop, typically, conventional mortgage rates fall as well. But, when yields rise, so do mortgage rates. Why? If a lender chooses to sell your mortgage loan to an investor, the lender will likely use Treasury yields as a benchmark for value.
As for Bernanke, when he made the decision to purchase securities, he did so with the goal of reducing bond yields, with the clear intention of lowering mortgage rates. This policy was implemented with the hopes of kickstarting the economy and the real estate market out of its deflationary cycle. But the only way to sustain such low rates will be for the Fed to continue purchasing securities. At some point this summer, Bernanke will have to make an important decision on whether or not to continue this policy. If he continues the policy, that will be a clear indication that the economy hasn’t yet turned the corner…but it will also be a red flag for future inflation.
