by Calculated Risk on 3/19/2009 02:45:00 PM

With the Fed buying longer term Treasury securities, how far will 30 year mortgage rates fall?

On CNBC yesterday, PIMCO's Bill Gross suggested mortgage rates might fall to 4%. I think this is unlikely.

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%.

Currently the Ten Year yield is 2.58% (typo corrected) suggesting a 30 year mortgage rate around 4.7%.

If the Fed buys Ten Year treasuries with the goal of 4.0% mortgage rates, they might have to push Ten Year yields down under 2.0%, maybe close to 1.5%.