The Treasury Department recently announced its intent to buy up to $600 million of mortgage backed securities. Their initiative is aimed at lowering mortgage rates, which they hope will stimulate the malaise in housing and the economy. By purchasing the mortgage backed bonds, their hope is that the spread between mortgages rates and the 10 year Treasury bond will narrow.
After the announcement, mortgage rates fell. On November 20th, the national average rate was 6.04%. Last Thursday, it was 5.53%. It is likely to be even lower when the new data is released today.
But, the yield on the 10 year treasury has fallen more than 30 year mortgage rates. On November 20th, the 10 year Treasury yield was 3.38%. It has fallen to 2.68%. Therefore, the spread between mortgage rates and the 10 year Treasury has widened to a huge 2.8%.
This does not necessarily mean that the Treasury action failed to narrow the spread – which was their intent. Certainly, mortgage rates fell. But, in this case, it was due to the fall in market interest rates and not the narrowing of the spread. This tells us that the market does not believe that 10 year Treasury yields should be so low, and that they are likely to increase. As they do, it is likely that they will rise faster than mortgage rates. And the spread will narrow.
The media reports the Treasury’s goal to lower mortgage rates to the mid-4’s. Will they be successful? Not unless the spread narrows. It is difficult to believe that 10 year Treasury rates could drop much lower than their present level. It is more likely that they will go up. It is however reasonable to believe that the spread between mortgage rates and the Treasury yield could narrow. At times during the last year –before the crisis- it has been as low as 1.4%. If that same spread existed today, mortgage rates would be at about 4.1%.
In the near term, it is not likely that the spread will narrow to 1.4%. But it is possible that it could narrow to around 2%. And if 10 year Treasury yields stay in the high 2%’s, 30 mortgage rates could fall into the mid to high 4%’s.
Mortgage rates are not likely to hold for long at these low levels. The massive amounts of federal financing necessary to support all of the bailouts will inevitably put upward pressure on interest rates. And as the economy begins to recover – if the bailouts work, there will also be upward pressure on rates.
During the next 60 to 90 days, we could see 30 year mortgage rates in the 4%’s. Once we reach the summer of 2009, mortgage rates will probably be back well into the 5%’s, and perhaps in the high 5%’s or low 6%’s.
What does this mean for you? If you would like to refinance, start watching rates and get ready to pull the trigger. If you are thinking about buying a house and want these lower rates as a buying incentive, the next 90 days could offer good opportunity. Rates are low and prices are depressed.
After the announcement, mortgage rates fell. On November 20th, the national average rate was 6.04%. Last Thursday, it was 5.53%. It is likely to be even lower when the new data is released today.
But, the yield on the 10 year treasury has fallen more than 30 year mortgage rates. On November 20th, the 10 year Treasury yield was 3.38%. It has fallen to 2.68%. Therefore, the spread between mortgage rates and the 10 year Treasury has widened to a huge 2.8%.
This does not necessarily mean that the Treasury action failed to narrow the spread – which was their intent. Certainly, mortgage rates fell. But, in this case, it was due to the fall in market interest rates and not the narrowing of the spread. This tells us that the market does not believe that 10 year Treasury yields should be so low, and that they are likely to increase. As they do, it is likely that they will rise faster than mortgage rates. And the spread will narrow.
The media reports the Treasury’s goal to lower mortgage rates to the mid-4’s. Will they be successful? Not unless the spread narrows. It is difficult to believe that 10 year Treasury rates could drop much lower than their present level. It is more likely that they will go up. It is however reasonable to believe that the spread between mortgage rates and the Treasury yield could narrow. At times during the last year –before the crisis- it has been as low as 1.4%. If that same spread existed today, mortgage rates would be at about 4.1%.
In the near term, it is not likely that the spread will narrow to 1.4%. But it is possible that it could narrow to around 2%. And if 10 year Treasury yields stay in the high 2%’s, 30 mortgage rates could fall into the mid to high 4%’s.
Mortgage rates are not likely to hold for long at these low levels. The massive amounts of federal financing necessary to support all of the bailouts will inevitably put upward pressure on interest rates. And as the economy begins to recover – if the bailouts work, there will also be upward pressure on rates.
During the next 60 to 90 days, we could see 30 year mortgage rates in the 4%’s. Once we reach the summer of 2009, mortgage rates will probably be back well into the 5%’s, and perhaps in the high 5%’s or low 6%’s.
What does this mean for you? If you would like to refinance, start watching rates and get ready to pull the trigger. If you are thinking about buying a house and want these lower rates as a buying incentive, the next 90 days could offer good opportunity. Rates are low and prices are depressed.
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