In the previous norm, when I asked a mortgage lender what the current rates were and where are we going, they would turn to the 10 year treasury bond. While not exact, it certainly did move in tandem, traditionally with a spread or difference in rate of about 1.75 So, if the 10 year treasury was trading with a yield of 4.5% then mortgage rates would be at about 6.25%. With the Fed's announcement several weeks ago that they would be purchasing 1.15 trillion in mortgage backed securities, treasuries moved down below 2.5%. The thought being that President Obama might get that 4.0% after all. But rates have been very sluggish in moving down. In fact the treasuries have moved much faster back up. Treasuries now on either side of 3.0%.
Are you still with me :) So, if we apply a traditional spread principal which says that investors would want at least 1.75% more for the risk of a homeowner defaulting on the debt versus the US government (when you think about it, is that enough of a spread?). With 3.0% treasuries, have we hit bottom in mortgage rates? The more debt the US issues the higher the risk and therefore the higher the yield should be, so naturally mortgage rates would follow in lock step if not race ahead. After all mortgages have to be riskier, right?
I could foresee a complete government intervention in the mortgage market, setting rates artificially low to reach the magic 4% number. But, it doesn't seem like that is currently in the cards and market forces have to take hold soon. So for those of you waiting for the 4%, is it worth the risk?
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