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But as the chart below shows, the spread between these two rates is still quite high from an historical perspective. That's due in part to the extreme volatility of 10-yr yields in the past few years. Investors need extra spread protection in this environment in order to buy mortgages, since falling yields trigger refinancings (which turn long-dated mortgage bonds into cash) and rising yields encourage homeowners to avoid refinancings (which leaves the investor saddled with a low-yielding fixed rate mortgage in a rising rate environment). When rates are relatively calm, as they were in the mid 2010s, the spread traded around 150 bps; today it is over 250 bps.
What I would expect to see is 10-yr yields settling down in a 3.5-4% range, and mortgage spreads tightening to 150 bps or less. That would put 30-yr mortgage rates at around 5-5.5%. And that would give a huge boost to the struggling housing market because it would make homes much more affordable.
9 comments:
It does look like 6% is the magic 30yr fixed level. If it hits that and goes even lower, we will see a very interesting economics experiment play out. Supply and demand will have a real tug of war.
Let's hope that affordability gets to a place where more people can reasonably expect to own a home. The country will be much better off.
Thanks for the post.
I'm not sure this century (shown in the plot) or especially the 2010s is a good reference period for where the spread will be. Maybe not even the entire bond bull market since 1982. Going forward, rate volatility may be larger, driving larger spreads.
The center of gravity for today's US economy is not interest rates but global de-dollarization. If the USD loses its privileges as the international reserve currency, the US economy will implode regardless of Fed actions to date. Prudent investors will act accordingly.
"de-dollarization" into what ? bitcoinazation??!
The USD as a reserve currency has great political benefits but the economic benefits go mostly for international banks and very specific sectors. For most households in the USA it has a holds a significant cost -- Countries like China, Japan and Germany export directly or indirectly their demand imbalances to the USA, causing either unemployment to increase or debt to rise. The day the USD loses its reserve currency status, it would either not change anything for the USA or just improve things. On the other hand, there will be no other reserve currency to take its place, exactly due to the costs mentioned.
I mean, even if people do not understand the issue where countries can export their imbalances, one can think about it this way: if reserve currency is such an awesome thing, why isn't the EU or China or Japan do everything in their power to have their own currency as the main global reserve currency?
If the demand for money rises as the economy sputters we might get two rate reductions.
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The Fed is only part of the issue. The election will be important for fiscal policy, and there may not be a scenario without inflation pressure being increased in the coming year:
"My view is that if [Vice President Kamala] Harris becomes president, it is 60%-65% likely that you won't see the cuts" that the market has priced in, Posen said. Traders in derivative markets expect 200 basis point in cuts over the next year.
"If [former President Donald] Trump gets in, I put it at 80%-90% they are going to be hiking a year from now," Posen said."
https://www.marketwatch.com/livecoverage/jackson-hole-news-key-fed-conference-kicks-off-with-market-focused-on-rate-cut-talk/card/posen-says-election-results-will-upend-fed-s-easing-plans-lm9zxvGL6PH16P6W2zac
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