Wednesday, December 09, 2009

Expected Mortgage Rates

by Bill McBride on 12/09/2009 03:02:00 PM

With the Ten Year Treasury yield at 3.42%, I was wondering what that would mean for mortgage rates.

Mortgage Rates and Ten Year Treasury Yield Click on graph for larger image.

This graph is from Political Calculations: Predicting Mortgage Rates and Treasury Yields (based on one of my posts).

Using their calculator and a Ten Year Yield of 3.42%, we would expect the 30 year Freddie Mac fixed mortgage rate to be around 5.38%. Of course it is lower than expected - as it has been from most of the year - and some of the difference from the expected rate is probably due to the Fed's MBS purchases (also prepayment speed is a factor - and also just randomness).

The following table shows the difference between the expected and actual rate for the last 6 months. This suggests that mortgage rates will rise about 30 to 50 bps relative to the Ten Year Treasury yield when the Fed stops buying MBS.

Ten Year Treasury YieldExpected Mortgage RateFreddie Mac Mortgage RateSpread
May3.28%5.28%4.86%0.42%
June3.71%5.59%5.42%0.17%
July3.54%5.46%5.22%0.24%
Aug3.58%5.49%5.19%0.30%
Sep3.39%5.36%5.06%0.30%
Oct3.37%5.34%4.95%0.39%
Nov3.40%5.36%4.88%0.48%
Average   0.33%

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