by Calculated Risk on 2/09/2009 12:36:00 PM

On CNBC this morning, PIMCO's Bill Gross said:

"I think at some point we're going to see a 4.5 percent mortgage rate and the 10-year Treasury rate capped at some level."

How far would the Ten Year yield have to fall for mortgage rates to decline to 4.5%? The ten year yield is currently at 3.045%.

Click on graph for larger image in new window.

This graph shows the relationship between the Ten Year yield (x-axis) and the 30 year mortgage rate (y-axis, monthly from Freddie Mac) since 1971. The relationship isn't perfect, but the correlation is very high.

Based on this historical data, the Fed would have to push the Ten Year yield down to around 2.3% for the 30 year conforming mortgage rate to fall to 4.5%.

The Fed could also buy more agency MBS to push down mortgage rates, but if they buy Ten Year treasuries with the goal of 4.5% mortgage rates, they might have to push Ten Year yields down significantly.