Yields on the 10-year Treasury hit their highest level since the start of 2014 and got very close to cracking the 3% mark.

At 8:00 on the morning of April 20, the 10-year yield was at 2.91% and rose steadily (except for a brief period between 10:30 and noon) before reaching 2.959% at 4 p.m.

The last time the yield was higher was on Jan. 8, 2014 when it was 3.01%.

The 10-year Treasury yield serves as a benchmark for long-term fixed-rate loan products and when it rises, so do mortgage interest rates.

Mortgage rates were already at their highest level for 2018, according to this week's Freddie Mac Primary Mortgage Market Survey.

10-year Treasury

If the 10-year holds at this level, mortgage rates are likely to rise over the next few days, said Len Kiefer, Freddie Mac's deputy chief economist.

The volatility in the bond market comes from increased expectations that short-term rates will rise, along with the improving U.S. economy which will drive higher wages and inflation. That is "putting a lot of pressure on long-term rates," Kiefer said.

Freddie Mac remains cautiously optimistic about housing this year even with rising rates. Early data is consistent with modest growth in the housing market. "Consumers are feeling good about the economy and the housing market. But if rates spike, that might be enough to dampen activity, but with a 4.5%, 5% mortgage interest rate, we can have a pretty good year for housing," Kiefer said.

The rising yields are not prompting Fannie Mae to further revise its 2018 mortgage forecast, Fannie Mae's Deputy Chief Economist Mark Palim said. It is still expecting a modest uptick in mortgage rates for 2018.

The unusual thing was that the stock market was down significantly (the Dow Jones Industrial Average ended the day 201 points lower) as the bond yields rose. The normal pattern is for money that comes out of the stock market to be invested in bonds, driving prices higher and yields lower.

However, investors are concerned about the rising U.S. deficit and what that means for the supply of U.S. Treasury notes being sold as well as expectations for higher inflation, Palim said.

"That has the bond market a little bit unsettled," he said. In addition, the Treasury Department is also winding down its investments in government debt and mortgage-backed securities. "So you need to have other buyers coming to the market to pick up the extra issuance of Treasuries. That is hanging over the market as a question mark — at what price would you get other buyers in to take that additional supply. So that puts pressure on bond prices and leads to high yields," Palim said.

Fear of more rate increases has investors looking for safe instruments like Treasuries to put their money into.

"The market consensus is that the Fed will increase the pace of rate increases and that is causing more demand for long-term bonds, as higher inflation is feared," said Mark Fleming, the chief economist for First American Financial.

"Nonetheless, the housing market can withstand higher mortgage rates with minimal impact. Even as mortgage rates increase, we remain well below the historical average of about 8% for a 30-year, fixed-rate mortgage," Fleming said.

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