Treasury-Mortgage Spread Stays Constant in June


The 30-year fixed-rate mortgage rate has been known to follow, albeit loosely, the 10-year Treasury yield. The latter is a widely tracked economic indicator and serves not only as a sign for the pulse of the U.S. economy, but also as a premium for pricing myriad financial instruments, upon which characteristics specific to the financial instrument are added.

As 10-year Treasury yields continued to hover near record lows in June, the 30-year fixed-rate Mortgage Rate continued to fall moderately in the same period. The below figure indicates that the gap between the two rates was a little shy of 250 basis points in the past four weeks. The volatility in the 10-year Treasury owes to the mixed reaction by the market of the positive news of nonfarm payroll gains offset by persistent unemployment claims.

As the 10-year Treasury yield is a more representative measure of all sectors of the economy, lenders can only keep mortgage rates so far away from it. Nonetheless, the housing market seems to have a clearer sense of direction on the road to economic recovery and leads it, with purchase applications having shown week-to-week gains for two months up through mid-June. Additionally, housing demand is well supported by low interest rates.

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