U.S Mortgages: Low Rates and High Risk
- US mortgage and treasuries rates are at historic lows following the market’s reaction to the COVID-19 crisis and the Federal Reserve’s action to address this.
- However, the spread between the 30-year fixed agency mortgage rate and the 10-year constant maturity treasury rate is close to its highest level since the mid-1980s, surpassed only by the spread at the end of 2008 during the Global Financial Crisis, and 80 bp higher than a year ago.
- While equities and corporate credit spreads have substantially recovered since their extremes in mid-March, high mortgage spreads have persisted through the end of May, with a period of 10 weeks over 250 bp.
- Although the agency mortgages are implicitly guaranteed against default, great uncertainty exists around the impact of the crisis on prepayments driven by delinquencies, refinancings, and relocations.
- Historic unemployment, massive additional government spending, Fed asset purchases, and an uncertain housing market have produced historically low mortgage rates and rarely seen mortgage-treasury spreads.
Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, May 27, 2020.
Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, May 29, 2020.