30-Year Mortgage Rates Inch Toward 6%

The U.S. economy’s surprising resilience since Hurricane Katrina is pushing long-term interest rates up sharply, raising prospects for 30-year fixed mortgages to cross the 6% threshold for the first time since spring.

The average rate on a conventional 30-year loan was 5.91% as of Friday -- up from 5.71% at the start of September and from 5.53% in early July, according to mortgage giant Freddie Mac.

Home loan rates are driven in part by rates on long-term U.S. Treasury bonds. The rates, or yields, on bonds are being pushed up by the Federal Reserve’s credit-tightening campaign and by the threat of worsening inflation from continued high energy prices, analysts say.

Higher interest rates mean borrowers get less house for their money. As a result, fixed-rate loans above 6% could “slow the pace of sales activity and slow the pace of price appreciation” in the housing market, said Robert Kleinhenz, an economist at the California Assn. of Realtors.

In the short term, however, a rise in mortgage rates could boost home sales, Kleinhenz said. “If buyers anticipate that rates will be headed north in the foreseeable future, that will give them an incentive to shift their buying plans forward,” he said.

Treasury bond yields surged again Monday after a report showed solid expansion in the U.S. manufacturing sector in September -- belying concerns that business activity might suffer in the aftermath of Katrina.

The manufacturing data show “the U.S. economy is in a substantial cruise-control phase,” said Michael McGlone, a bond analyst at investment firm ABN Amro in New York.

The annualized yield on the 10-year Treasury note, a benchmark for mortgage rates, jumped to 4.39% on Monday, up from 4.33% on Friday and the highest since Aug. 10. Bond yields rise as the securities’ prices fall.

A few more ticks higher and the 10-year T-note will be at its highest level since mid-April.

Some investors rushed to buy bonds, and lock in yields, immediately after Katrina hit the Gulf Coast at the end of August.

The bet was that the storm’s effects -- particularly record energy prices -- would ripple across the economy, slowing consumer and business spending.

Many bond buyers also figured that the Federal Reserve would stop raising short-term interest rates, at least temporarily, to gauge the extent of the economic disruption.

Heavy buying of Treasury securities pushed the yield on the 10-year T-note down to 4.02% on Aug. 31. It had been at 4.21% less than two weeks earlier.

But bond yields have been in a sharp uptrend for the last three weeks as some investors have reconsidered the wisdom of locking in rates at recent levels.

One big blow to the bond market was the Fed’s decision on Sept. 20 to boost its key short-term rate for the 11th time since mid-2004, from 3.5% to a four-year high of 3.75%. The central bank downplayed the economic threat posed by Katrina.

And indeed, there has been little evidence in recent weeks that the U.S. economy as a whole is in danger of slowing markedly.

In the manufacturing sector report Monday, the Institute for Supply Management said its index of factory activity in September rose to 59.4 from 53.6 in August. Any index reading above 50 indicates economic expansion.

Some analysts say there still is a risk that the economy could stumble soon. Manufacturing, for example, may have been boosted last month because companies ordered goods from multiple suppliers in the wake of Katrina, hoping to minimize supply interruptions, the supply-management institute said.

What’s more, consumer confidence plunged in September, according to several surveys.

“Where consumer sentiment goes spending is sure to follow,” said Kathleen Camilli, head of Camilli Economics in New York.

She believes the Fed’s Sept. 20 rate hike was its last. But that is a minority view on Wall Street.

Many analysts say the Fed -- and bond investors -- increasingly is worried that high energy prices will filter through the economy, driving overall inflation rates up in 2006. Inflation is the scourge of bonds because it eats away at fixed returns.

The Fed has pledged to damp inflation by raising interest rates until they no longer have a stimulative effect on the economy.

Rising bond yields show “there’s more concern that the Fed’s work is not yet done,” said Bill Hornbarger, a fixed-income strategist at brokerage A.G. Edwards in St. Louis. He expects the Fed to boost its short-term rate three more times, and says that could drive the 10-year T-note as high as 4.75%.

If conventional mortgage rates follow, they could deal a blow to first-time home buyers as well as to homeowners who now have adjustable-rate loans and who hoped to refinance using fixed-rate loans in the near future.