The majority of fixed-rate conventional mortgages have historically correlated
with the 10-yr Treasury Bond yield in determining 30-year interest rates.
A vast majority of home mortgages are insured or bought by quasi-governmental
agencies, such as Ginnie Mae, Fannie Mae, and Freddie Mac. These mortgages
are insured under the FHA, securitized and given investment grade ratings,
meaning they can compete for investor capital with bonds and other structured
So, it behooves the federal government to align mortgage rates with other
investments that compete for Wall Street dollars. Over the years, the
exception to this rule has been adjustable mortgage rates, which follow
other indices such as checking and savings account rates, various bond
yields, or international overnight lending rates. By aligning fixed mortgage
rates with Treasuries, it ensures a steady stream of investors willing
to put their capital into mortgages, providing a replenishment of capital
for the mortgage industry.
Over the past four decades, the conventional 30-yr mortgage rate has remained
strictly in line with the ten-year Treasury yield rates—a trend
recent market activity is defying. Experts are pointing out that fixed-rate
mortgages now seem to be following a different set of rules rather than
closely mirroring the bond market. Typically, FHA mortgages have a spread
of between 1.5 to 2 percent over that of Treasury Bonds. The higher rate
is meant to offset a slightly greater risk to investors participating
in mortgage-backed securities.
Between December 29, 2016, and February 16, 2016, the thirty-year mortgage
rate declined from approximately 4.32% to 4.15%—a drop of seventeen
basis points not correlated to the bond market. Comparatively, the ten-year
Treasury yield started and concluded the same interval at a steady 2.49%
with little variance.
The thirty-year fixed-rate mortgage rate fell to 4.15% for the week of
February 13-17, 2017. This rate was a decline from the preceding week,
where the median rate was 4.17%, but remained considerably above that
of last year’s mark of 3.65%.
The five-year Treasury-indexed hybrid adjustable-rate mortgage fell to
3.18% for the week of February 13-17, a decline of a mere .03% over the
previous week, yet still showing a spike over last year’s 2.85% rate.
While the majority of financial analysts are confident that these deviations
will be short-lived while mortgage rates once again align with historical
Treasury yields, there may be more surprises ahead for a market that has
been demonstrating its ability to buck normal financial trends.
For more information call