I generally tell potential borrowers that if they follow the 10 Year US Treasury note rate, it generally is a good indication of the direction of 30 year fixed mortgage rates. It still is a good indicator, but other elements are currently having an effect skewing their correlation.
Two constants…
#1 even though 30 year mortgages are loans amortized over 30 years, they generally only have a life span of approximately 8 years. Mortgages are generally paid off either by refinancing, or the property sold. That’s why investors compare the returns when purchasing notes/bonds with corresponding maturity dates.
#2 Mortgage Backed Securities always have a higher rate correlating with a higher risk than US government issued notes and bonds. A mortgage can go into default due to non-payment, and foreclosure of the secured asset… the US government won’t go into bankruptcy, making it the most secure (thus low rate) investment.
The spread between the rates of the 10 Year Treasury and 30 Year Mortgage has expanded substantially over the past few months. Basically doubling from 1.375% the end of last year, to the present 2.81%.
When the COVID pandemic business shutdowns the goverment conducted Quantitative easing—QE for short—is a monetary policy strategy used by central banks like the Federal Reserve. With QE, a central bank purchases securities in an attempt to reduce interest rates, increase the supply of money and drive more lending to consumers and businesses. By purchasing Mortgage Backed Securities the mortgage rates were artifQuantitative easing—QE for short—is a monetary policy strategy used by central banks like the Federal Reserve. With QE, a central bank purchases securities in an attempt to reduce interest rates, increase the supply of money and drive more lending to consumers and businesses. Basically dropped much lower than a normal market of security supply and investor demand would have generated. The US goverment became the largest buyer in the world for our own bonds and mortgage backed securities.
$9 Trillion was accumulated on the US Treasuries spreadsheet.
In June 2022, it began to shrink its balance sheet, popularly called quantitative tightening, by allowing initially up to $30 billion of Treasury securities and $17.5 billion of MBS to roll off the balance sheet each month for the foreseeable future. Quantitative tightening is the process whereby a central bank sells its accumulated assets (mainly bonds) in order to reduce the supply of money circulating in the economy. This is also referred to as ‘balance sheet normalization’ – the process whereby the central bank reduces its inflated balance sheet. The present goal is to drain $3.3 trillion off the balance sheet.
On a proportionate basis, the quantity of mortgages coming off the government balance sheet is more impactful than the notes. Thus the rate for mortgages is going up faster than notes.
History: In the era between the mid-1970s and the mid-1980s, the Fed was aggressively pushing up Treasury yields to battle the markets with massive rate hikes. And mortgage rates in 1980 – like today – were running ahead of the 10-year Treasury yield as lenders were trying to deal with inflation. Eventually, Treasuries caught up, and then there were massive rate cuts, followed by more massive rate hikes, followed by massive rate cuts, and the spread blew out and shrank with huge volatility.
The current situation – an incredibly spiking inflation that the Fed is belatedly getting serious about – is much closer to the scenario of the 1970s and 1980s than it is to the Financial Crisis and the March 2020 crisis. During the latter two, spreads widened because the Fed pushed down Treasury yields while mortgage rates lagged. Now the spread is widening because mortgage rates are running ahead and are rising faster than the 10-year yield. It’s likely that the spread will be very volatile, and potentially very wide for certain periods, with mortgage rates potentially outpacing Treasury yields by a wide margin during these periods, before Treasury yields catch up or mortgage rates back off.
Next week the Federal Reserve meets again and we’ll have to see if its interest rate and balance sheet approach stays consistent or will be modified.
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free in contacting me
Ron Henderson GRI, SRES, SFR, RECS, CIAS
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
Leave a Reply