Treasury Yields With A Lag

Over the past two years, a major factor that had been driving mortgage rates upwards is now contributing to their decrease. The average 30-year fixed mortgage rates, typically aligned with benchmark Treasury yields, had seen a significant spread. However, this differential has been consistently narrowing for the past eight weeks, reaching its smallest margin since March.

  • Recently, the 30-year mortgage rate dropped to 6.62%, as reported by Freddie Mac. This decline is partly due to the decreasing spread between mortgage rates and the 10-year Treasury yield.
  • Though Treasury yields have also fallen sharply, the spread remains above its historical average. Yet, its downward trajectory is aiding in lowering mortgage rates, benefiting potential homebuyers, mortgage lenders, and real estate agents who have been affected by high borrowing costs.

Signs Of Life

Adam Haller, a mortgage-loan officer in Raleigh, N.C., notes the industry's excitement over the falling rates since October. This spread exists due to the structure of the home-lending industry, where mortgage loans are bundled into bonds and sold to investors. These investors seek higher yields from mortgages than Treasurys to compensate for associated risks, influencing the rates for borrowers.

  • Investors are demanding higher yields for several reasons, including the risk that current mortgages might be refinanced at lower rates, impacting their income streams.
  • The reduction in mortgage purchases by major buyers like banks and the Federal Reserve, especially since the Fed's interest rate hikes in early 2022 to tackle inflation, also plays a role.

However, with the Fed signalling a possible end to rate increases and potential cuts this year, investor demand for mortgages is slightly rebounding, further narrowing the spread.

Normalisation After Some Volatile Times

Wendy Edelberg of the Brookings Institution observes a decrease in financial concerns regarding this market. Mortgage bankers and industry players are closely monitoring the spread, anticipating that a return to historical levels could boost new mortgage demand. However, current rates might not be sufficiently low to significantly drive up housing purchases, according to Thuan Nguyen, a mortgage broker.

  • The mortgage industry has experienced a sharp downturn following the rapid rate increases in 2022, contrasting with the boom period during the pandemic's low-interest rates.
  • Yet, with the recent decrease in rates, there's a sense of optimism, and expectations are for the spread to contract further.


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