The spread between 30-year fixed mortgage rates and 10-year treasury yields hit its highest point in over a year in the week of February 25th, at 2.52%.  Mortgage rates averaged 6.24% while treasuries closed Thursday at 3.72%. 

I have been tracking the spread between 10-year treasury yields and 30-year fixed mortgages since January, 2007. In that time, I have seen this spread, or difference, move from an average of 1.5% in early 2007, before the subprime mortgage problems led to an overall reevaluation of credit quality, to an average substantially over 2%.

At this time, the 10-week moving average stands at 2.07%, meaning that, on average, 30-year fixed mortgages are over 2% higher than 10-year treasuries. 

The increase in this spread has come primarily from an overall rethinking of credit risk.  This analysis has resulted in decreased liquidity in housing markets.

Based on the extent of this spread, it appears there is a greater likelihood of improving mortgage rates in the short term.  I believe it is unlikely that the spread will remain over 2.25% without meaningful news that impairs the value of mortgage debt. 

 

9 Comments on Could Rates Be Ready to Fall Again? Treasury / Mortgage Spread Hits Widest Point

FEB
29
2008
1 Featured Post Outside Blog
Wild cards coming:  the new "conforming jumbo" loan pools that FNMA is having to create because investors in the TBD market don't want the new jumbo's in the regular conforming loan pools.  It will be interesting to see what the spreads will be then!
10:59am • #1

I hope you are right Dan... this could be awesome... rates are down today... and looks like they are going to go further...
11:15am • #2
185,141 Points 2 Featured Posts Outside Blog

Dan - isn't there a natural difference between the two type of bonds - such as length of time?  The 10 year treasury note is held for 1/3 the time, therefore the yield would be expected to be less?
11:57am • #3
3 Featured Posts

Rich - great point about the changes in rates that we may see relative to changes in the underlying loans.  That will be something to keep an eye on. 

Rick- thanks for your comments.  Things are looking better today

Matthew - Thanks very much for your astute question!  There certainly is a natural difference between the two instruments, for a number of reasons, most notably:

  • Default Risk - Treasuries are backed by the full faith and credit of the US Government and are practically guaranteed against default.  As we've seen with the rise in foreclosures, that isn't the case for mortgages lately. 
  • Liquidity Risk - It's easier to sell treasuries because more investors are buying and selling them, whereas mortgages can present a greater challenge

Because of these differences, there will always be a difference between mortgage and treasury rates, however, the time factor is not as important as the other two.  Keep in mind that the US Treasury also sells 30-year bonds.  Those tend not to yield much more than 1/4% over 10-year treasuries, which explains only a small part of the difference. 

Thanks again,

Dan
12:07pm • #4

Thanks for the info!! Have a great one!

~Christina

http://Christina.Angel-Realty.com
12:51pm • #5
Attended Rain Camp

Dan, I would love to see the chart, do you have the data in excell?

 Marlo
1:05pm • #6
3 Featured Posts

Marlo -

chart of the mortgage:Treasury spread July 07 to present

There you go!  As you can see, the spread pushed up to a new high level last week.  I don't think there is any real change in risk that caused that, so I believe it will improve. 

Thanks,

Dan
1:15pm • #7
1 Featured Post Outside Blog
Dan, I love your thinking!  Let's go have some chowder next week, I know a great place in Cranston!  Just kidding, I love RI though.  I love economic "nerd" posts...I feel like I've found a kindred soul!
1:28pm • #8
Attended Rain Camp

Nice :) and I agree with your conclusion. look at how the market tanked today, next week will be interesting.

 

Marlo
7:36pm • #9


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Dan Hartman

Providence, RI

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