Brace yourself: Interest rates likely to climb higher

The second factor, the rising supply of bonds, points to a longer-term concern. The government debt is fasting rising toward a level equal to a year's gross domestic product for the nation. That's often viewed as a danger zone, where lenders demand higher interest because the risk of default is rising.

Some analysts worry that the result will be inflationary policies, as the Federal Reserve tries to keep a debt-bloated economy afloat.

Once clear signs emerge that the recession is ending, the Fed may have to reassert its determination to maintain stable price levels in the economy. If the Fed does this successfully it could have a calming effect on interest rates. By raising the short-term interest rate that it sets for banks, the Fed could actually thus stabilize private-sector interest rates, Cosgrove says.

Even if the Fed does its job perfectly, the White House and Congress will need to figure out how to put the nation's fiscal house in order. The threat of rising debt and rising borrowing costs could prompt the Obama administration to raise taxes.

In Beijing this week, Treasury Secretary Timothy Geithner assured Chinese leaders that the Obama administration is committed to taming the US budget deficits. Chinese Premier Wen Jiabao roiled financial markets in March when he expressed concern about the safety of China's holdings of US government debt.

Pressure on mortgage rates
Meanwhile, the Fed also has a near-term policy challenge. It has been buying mortgage-related bonds in an effort to heal the housing market. Now, with private bond markets putting upward pressure on interest rates, the Fed has to decide how far it can push its strategy.

The average rate for a 30-year fixed mortgage is back at 4.91 percent this week, up from 4.82 percent last week, mortgage giant Freddie Mac said Thursday.

Low rates, aided by the Fed's buying of bonds, led to a surge in mortgage applications.

Applications rose for five straight weeks between early March and early April, according to the Mortgage Bankers Association. And sales of both existing and new homes ticked higher from March to April, according to data released this week.

But now the Fed and private investors are pulling in opposite directions. If that persists, the Fed won't be able to outweigh other players in the bond market.

• Material from the Associated Press was used in this story.

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