The difference between mortgage rates & U.S. treasury rates (aka-The Spread) is the story to watch in 2024
For the past 6 months we’ve been pointing out how many interest rate markets are out of whack. While technical in nature, these topics are SUPER IMPORTANT to watch if you are even remotely interested in the future direction of mortgage rates. Since most of our readers either own a home or hope to own one in the near future, this content is critical to cover and keep you informed.
Typically, most interest rates trend in generally the same direction (up or down). Here is a chart showing how both mortgage rates and treasury rates have been in sync with one another over the years.
But these normal relationships have severed as of late. Mortgage rates have risen at a faster pace than treasury rates, and remained at these inflated levels for nearly two years. These oddities have occurred before in prior decades, but generally when things get out of whack they snap back in order fairly quickly. Presently, the difference, or “spread”, between rates on 10-yr treasury rates and 30-yr mortgage rates stands at 2.78%, over 1% higher than the 40-year average!
As you can see in the historical chart, there have been only two prior instances when this spread has flirted near 3%. In both cases, things returned fairly quickly back and even bottomed out well below the long-term average. This time around, however, the spread has lingered at nearly 3% for over a year and a half!!! I shaded in red the duration the spread lingered over the average of 1.75% to easily illustrate how odd the current episode looks.
What gives? Our prior post on this topic explained the two distinctive risks investors face when purchasing mortgages versus treasury bonds (in short, foreclosure risk & pre-payment risk). Market experts are stumped as to why investors continue to see such high risks in mortgages. The Mortgage Bankers Association president forecasted just last week that they anticipate this spread to reduce as we proceed through 2024. Falling inflation & The Fed’s pivot on their approach to fighting inflation are the cited reasons why investors will see lower risk in mortgages, which will lower the spread and will ultimately lower mortgage rates.
The next test of this theory is coming up at the end of the month when The Fed meets next. At their last meeting on December 13th, we saw this spread drop severely as investor’s recalculated their perceived risks of holding mortgage bonds. Let’s hope January’s meeting has a similar result!