US mortgage rates hit highest since October as war keeps bond yields up, MBA says

March 25 (Reuters) - The interest rate on the most popular U.S. home loan surged by the most in 11 months last week to the highest since October as rising oil prices from the war in Iran fanned inflation fears, forcing up yields on the Treasury bonds most influential to mortgage rates.

The Mortgage Bankers Association said on Wednesday the contract rate on a 30-year, fixed-rate mortgage rose 13 basis points to 6.43% in the week ended March 20, the highest in nearly six months.

After starting the month at their lowest level since September 2022, mortgage rates since the U.S. and Israel launched air attacks against Iran have climbed by 34 basis points in three weeks, and last week's increase marked the largest weekly rise since April.

The MBA's weekly applications index tumbled 10.5% last week to 310.7, the lowest since January, led by a 14.6% drop in applications to refinance existing loans. Applications for loans to purchase a property slid 5.4%.

The yield on the 10-year U.S. Treasury note, the government security most influential to mortgage rates, has shot higher since the war began and Iran effectively closed the Strait of Hormuz, choking off the flow of about a fifth of the world's petroleum. Benchmark global crude oil prices have shot up from about $75 a barrel in late February to around $100 a barrel now.

The 10-year Treasury yield has climbed from 3.96% on the Friday before the attacks began on February 28 to 4.39% on Tuesday, matching its highest end-of-day level since July.

Bond and interest rate futures markets have repositioned for the prospect that the U.S. Federal Reserve will hold off on any interest rate cuts this year. Prior to the start of the war the market had expected at least one 25-basis-point reduction this year.

"The threat of higher for longer oil prices continued to keep Treasury yields elevated, and mortgage rates finished last week higher," said Joel Kan, MBA's vice president and deputy chief economist.

"Given this period of increasing mortgage rates and diminishing refinance incentives, refinance applications decreased 15 percent as applications across all loan types declined. Purchase applications were also down last week, as higher mortgage rates, coupled with affordability constraints and economic uncertainty, pushed some potential homebuyers to the sidelines."

(Reporting By Dan Burns; Editing by Cynthia Osterman)