In spite of an unprecedented move by the Federal Reserve on November 25th to purchase $600 billion in mortgage-related assets, the spread between mortgage and treasury rates remained at its highest level on record for the week ending December 4th, closing at 2.96%.  Investors sought the safety of treasury securities in droves, increasing their prices, and depressing the yield of the 10-year treasury note to its lowest close ever at 2.57% this Thursday.  In spite of rampant speculation that the Fed may be prepard to act again, mortgage securities found few buyers.  Mortgage rates averaged 5.53%, according to Freddie Mac.

The 10-week moving average spread entered December at 2.58%.

The mortgage-treasury spread measures the relative risk between mortgage securities and treasury securities.  Essentially, the spread is the additional return on investment that an investor requires to mitigage the risk associated with investment in mortgages.  The spread has been on an unprecedented widening trend since July of 2007, when it averaged 1.52%. That was the month in which the collapse of the secondary mortgage market accelerated. 

There has been significant talk this week of a "Flight to Safety", a market phenomenon in which investors seek the investment most likely to preserve the value of their capital.  This has been evidenced in the dramatic increase in demand for treasury securites, as they are viewed as risk-free.  Due to this higher demand, returns on treasuries are at their lowest levels on record.

Through 2007, the Mortgage - Treasury Spread has increased by nearly a full percentage point as investors worries have not been assuaged by a bevy of government actions. 

Still, opportunity exists to correct the current market situation.  The "4.5% plan" is still a possibility, although news indicates that its reporting may have been quite premature.  Additionally, proceeding with such a plan could likely be a profitable venture for the US Treasury, albeit one that sets a risky precedent.  By issuing treasury debt to fund purchase of mortgages, the Treasury would be earning a roughly 2% return on its investment, and would likely see capital appreciation in the assets it purchases as mortgage rates fall.  However, this opens up concerns that the government may interecede in future crises, and leaves open the possibility that this investment may not pay off.  

Today's employment data is also quite discouraing, as 533,000 jobs lost also means 533,000 families less able to meet their mortgage obligations, further reinforcing investor concerns about mortgage assets.  Other data suggests that mortgage delinquencies are at an all-time high, as well. 

The mortgage market has been looking for a way out of the woods for a long time now.  While last week's announcements appeared promising, further review has shown that we are still faced with serious problems to correct.  Others have suggested helping families facing foreclosure directly by assisting with their mortgages, this solution only provides limited relief to a strapped economy.  Insteady, I hope to see news soon of major government investment in areas that will create jobs, such as infrastructure - roads, bridges, sewers.  People with jobs can pay their mortgages, which leads to higher home prices, and more jobs, among other things.  Only time will tell.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor with Roger Williams University, and can be reached at (401) 263-8655, or by leaving a comment on this article.