This past week, home loan rates ticked up again despite the Fed recently cutting rates by a full point and the 10-year Note remaining just above 1%. Why?
Mortgage backed securities (MBS) are bonds that price home loan rates. This week, the spread or difference in yield between the 10-year Note and MBS spiked to the highest level in decades. This means that despite the record low yield in Treasuries, home loan rates continue to rise.
This has to do with MBS investors having less of an appetite for MBS, given the uncertainty of the current economic environment. The only way you can attract investors to buy MBS is by increasing the interest rate or yield to the investor. We are seeing this today.
Also, there is a reality that $1T in bonds will be coming to the bond market in the near future to pay for the economic stimulus package in order to help the economy during and after this coronavirus crisis. That huge amount of new bond supply dilutes the bond market and pressures prices lower and rates higher.
We may not see a more natural interest rate spread between Treasuries and MBS until we get past the worst of the coronavirus and its economic impact. Until then, expect more price and rate volatility.
Bottom line: home loan rates remain very close to the best levels ever, and with the Fed buying MBS for the foreseeable future, we are not expecting home loan rates to go too high any time soon
Forecast for the Week
The upcoming week will be primarily focused on the continued fallout from the coronavirus, after we saw jobless claims spike last week, while a key regional manufacturing report saw its worst reading since 2009.
Investors will be looking for a bottom in stocks while also looking for an end to the declining prices for Mortgage Bonds.
Mortgage rates jumped last week, though they remain just above historic lows. The increase in rates was due in part to lenders increasing prices to help manage skyrocketing refinance demand, reported Freddie Mac.
Extreme volatility will continue as the markets deal with the coronavirus, central bank intervention, along with massive government stimulus plans.