It goes beyond Fed moves on interest rates, as other inflation-fighting changes also have an impact. Once those changes lessen, rates could begin to fall.
NEW YORK – Historically, the costs for borrowing money for a home stay fairly close to 10-year Treasury yields. In the current market though, rates are rising without a dramatic change in Treasury yields.
Analysts cite as one factor that’s having an impact: A change in the entities buying government-backed bonds that pool many home loans into investments that, in turn, power the market price of a standard mortgage.
The U.S. Federal Reserve and large banks – traditional major buyers of government-backed bonds – have cut back on their purchases. As the Fed tries to reduce its balance sheet, and banks are work to overcome higher interest rate, both have collectively shrunk their portfolios of agency mortgage-backed securities by approximately $207 billion, according to figures compiled by strategists at Bank of America.
The current coupon yield on 30-year agency MBS (mortgage-backed securities) was at 6.4% at the end of September, according to figures compiled by analysts at KBW. That was a 1.8 percentage point premium to the 10-year Treasury yield, compared with a 21st-century average of approximately one point.
Also, mortgage originators who make the loans and sell them into the market make a profit. Typical 30-year fixed rates on new conforming mortgages, at more than 7.4% at the end of September, have grown well ahead of 10-year Treasury yields, then at just under 4.6%, according to Intercontinental Exchange rate data. The pre-pandemic average from 2017 to 2019 was under two points.
Source: Wall Street Journal (10/04/23) Demos, Telis
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