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Mortgage Rates Dropping as Bond Yields Approach 11-Month Low

MAY 15, 2014 3:26pm ET
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A rally in the mortgage-bond market may send home-loan rates to the lowest in almost a year, bolstering a slowing real estate recovery.

Yields on Fannie Mae securities that guide borrowing costs because they're used to package new 30-year mortgages for sale fell 0.04 percentage point today to about 3.16% as of 1:50 p.m. in New York, according to a Bloomberg index. That would be the lowest closing level since yields reached a four-month low of 3.15% on Oct. 29, after they surged to as high as 3.81% in September.

Bond yields are tumbling this year as investors find fewer signs of strength in the economy than expected and less-than-anticipated damage to debt prices from the Federal Reserve's reduction in its buying, said Vitaliy Liberman, a money manager who focuses on mortgage securities at DoubleLine Capital LP.

"Here we are in May 2014, and things are not as clear as they were five months ago," Liberman said today in an interview in New York. His firm's $32.7 billion DoubleLine Total Return Bond Fund has gained 3.95% this year to beat 94% of peers, according to data compiled by Bloomberg.

Benchmark U.S. Treasuries gained today even after U.S. consumer-price inflation in April rose, claims for jobless benefits in the U.S. unexpectedly fell and a gauge of regional manufacturing increased more than forecast. Data showed the euro-area recovery failed to gather momentum last quarter, as France unexpectedly stalled and economies from Italy to the Netherlands shrank.

The average rate offered on typical 30-year mortgages fell to a six-month low of 4.2% this week from a 2013 high of 4.58% in August, according to Freddie Mac surveys. Borrowing costs, which are driven by changes in lenders' profit margins as well as bond yields, are up from a record low 3.31% in November 2012.

Sales of previously owned homes dropped in March to the slowest pace since July 2012, as higher property prices and loan costs held back buyers, according to National Association of Realtors data. The further fall in mortgage rates "will help in terms of affordability but not to the extent one might expect," Liberman said.

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