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Thursday, March 20, 2008

Mortgage Rates and the Ten Year Treasury

by Calculated Risk on 3/20/2008 04:44:00 PM

Thirty year mortgage rates fell sharply in the last week. Housing Wire reports the numbers: Mortgage Rates Swoon Amid Market Uncertainty

Fixed mortgage rates fell sharply in the past week, with the average conforming 30-year fixed mortgage rate now 5.98 percent — a 41 basis-point drop from last week. According to’s weekly national survey of large lenders, the average 30-year fixed mortgage has an average of 0.38 discount and origination points.
And from Freddie Mac: Long-term mortgage rates plummet
Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 5.87 percent with an average 0.5 point for the week ending March 20, 2008, down from last week when it averaged 6.13 percent.
Freddie Mac reported mortgage rates were this low in the middle of February (about one month ago).

The following graph compares the weekly 30 year mortgage rate (as reported by Freddie Mac) with the weekly ten year treasury yield. The black line is the spread between the two rates.

Mortgage Rates and Ten Year TreasuryClick on graph for larger image.

The spread between the ten year treasury and the 30 year mortgage tends to rise when the ten year yield is falling sharply. This is probably because investors believe homeowners will hold their mortgages longer. This can be seen in 2002 and again last year.

However the recent increase in the spread is probably due more to liquidity issues, as opposed to an increase in holding period. Last week 30 year mortgage rates declined both because the ten year yield declined, and because the spread declined somewhat. Still, the spread of 2.5% for GSE loans above the ten year yield, is still 0.5% or more above the normal spread. The spread will probably decline further if the liquidity crisis eases.