After a record rally, mortgage bonds are poised to slump in March when the Federal Reserve curtails a program to purchase $1.25 trillion of the securities, likely driving up interest rates on loans for new homes.

Analysts said the extra yield over benchmark rates that investors demand to hold the securities will widen as much as half a percentage point as the Fed stops purchasing. The 11-month-old program has reduced yields, which guide lending rates, by about 1 percentage point, according to estimates from BNP Paribas SA.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.