Government will rely on shorter-term notes

By Kathleen M. Howley
Bloomberg News

Boston — The U.S. government announced yesterday it is suspending the sale of 30-year Treasury bonds, in a move that analysts said may drive mortgage rates to new lows as demand shifts to 10-year notes, which are used as a benchmark for setting mortgage rates.

The government said it will instead rely on securities with a shorter maturity to finance the national debt. Elimination of new sales will not change the amount of 30-year bonds already in circulation, according to the announcement, although the level will dwindle as the bonds mature or if the government redeems some of the debt before maturity.

Demand for 30-year bonds in circulation has soared as investors rushed to snap up a product that offers a government-guaranteed interest rate for such a long period. The higher demand by investors willing to pay more for the 30-year bonds in circulation pushed their yield down to 4.87 percent, the lowest since October 1998.

Yesterday, analysts and lenders said the effect on mortgages would be quick.

"Right away, we're going to see mortgage rates go an eighth of a point lower," said Barry Habib, head of sales training for GMAC Mortgage Co., the fifth largest mortgage lender.

The average rate on a 30-year mortgage stood at 6.64 percent last week, according to Freddie Mac, the No. 2 buyer of mortgages. Mortgage rates hit a low of 6.49 percent 33 years ago.

Banks use 10-year Treasury note yields to help establish mortgage rates, along with yields on mortgage securities, and Fannie Mae and Freddie Mac bonds, said Melissa Cohn, president of Manhattan Mortgage Co. Rising demand for 10-year notes will drive up prices, leading to lower yields and mortgage rates, she said.

Lower mortgages may give a boost to the housing market, which has shown signs of weakening. Sales of previously owned homes fell a greater-than-expected 12 percent in September, according to the National Association of Realtors.