Mortgage / Treasury Spread Widens, On Average

Mortgage rates moved up sharply as last week drew to a close, propelled by a string of positive news out of Wall Street.  Several major banks reported colossal losses, yet, because these losses were less than the even more colossal losses that had been expected, the stock market reacted by increasing over 4% on the week, taking wind out of the sails of bonds.  Remember that when bonds fall, yields, or rates, increase, and on the week we saw between .25% and .375% increase in rates on most mortgages. 

We've seen a few months now of a higher-than-normal spread between 30-year fixed mortgages, and 10-year treasury notes.  Last week's 10-week average spread stood at 2.33%, a recent high.  As I study this spread further, I'm finding additional historical information about it, and it appears that there is precedent for a spread at the level we are currently seeing. 

Historically, there has been a pattern of movement in this spread, increasing when treasury rates decrease, and decreasing as they increase.  So, as we have seen a big decline in treasury rates over the past few months, mortgage rates have, to an extent, followed, but not nearly to the hoped-for degree.  This is assuredly due, in part, to the weakness of mortgages as an investment today.  There are prospects that the economy will start to improve as banks recapitalize and adjust their investment practices.  As this happens, treasury rates should increase, with mortgages following slightly behind. 

For the week ending 4/17 the Mortgage: Treasury Spread closed at 2.15%, down from the prior week's 2.36% as Treasuries sold off sharply throughout the week.  The week's news was dominated by the previously mentioned stock market successes. 

Looking forward, expect more news out of Wall St. to substantially impact rates this week.  In addition, the following reports are coming up:

Tuesday: Existing Home Sales

Thursday: Jobless Claims, Durable Goods, New Home Sales

Friday: Consumer Sentiment

Look for the Durable Goods report to potentially move yields, as higher-priced items like washing machines and aircraft, have a significant impact on the economy.  Consumer sentiment will also figure significantly, as Wall Street is expecting consumers to drive the economic recovery. 

Also, keep in mind for this week that the Fed will be meeting next Wednesday.  Current surveys indicate Wall Street is expecting a .25% cut in rates, but if more companies report positive earnings information, that could change.  Thus far, Fed intervention has had verry little effect on mortgage rates.  I imagine that sometimes Ben Bernanke feels like this cat.  For the moment it is prudent to lock loans as soon as realistically possible. 

Coming soon: Customer Retention Part 2.