Rate Update and The 10-Year Note Yield

Despite very little in the way of economic news, there was a nice rally in both stocks and bonds last week, leading to slightly better mortgage rates. President Obama signed into law an expanded Homebuyer Tax Credit bill, which extended the deadlines for first-time buyers and added a new $6500 credit for experienced homeowners. Fannie Mae and Freddie Mac also announced the extension of the high-cost loan limits (up to $687,500 in SLO County) through 2010, which offers some relief for borrowers with higher balance loans while traditional jumbo markets remain dormant. Currently, the 30-Year Fixed sits at 4.500% (4.679% APR) and the 15-Year Fixed is at 4.250% (4.557% APR). This week, we will see the latest inflation data in the form of Producer Price Index, Consumer Price Index and Retail Sales.

The 10-Year Treasury Note yield is often referred to as the benchmark indicator for mortgage interest rates, as its term most closely matches the duration of mortgage-backed securities (MBS). Historically, the 30-Year Fixed mortgage interest rate has been 177 basis points over the 10-Year Treasury Note yield. For example, if the 10-Year yield is at 3.250%, then the 30-Year Fixed mortgage is expected to be at 5.020%. In today’s turbulent market conditions, mortgage rates are experiencing a disconnect from the traditional market indicators.

In November 2008, the 10-Year Note yield averaged 3.530% and the 30-Year Fixed mortgage rate averaged 6.200% – a difference of 267 basis points! The significantly higher spread indicated the demand side of the MBS market was weak, and it was critical that the Federal Reserve act swiftly and appropriately to support the mortgage and housing markets and to improve conditions in financial markets. Accordingly, the Fed created a program to buy MBS. To date, the Fed has been a net buyer of $1 trillion worth of MBS since its first purchase in January 2009. Under the MBS purchase program, the Fed will purchase $1.25 trillion backed by Fannie Mae, Freddie Mac and Ginnie Mae.

Today, the 10-Year Note yield is down to 3.330% and the 30-Year Fixed mortgage rate is at 4.500% – a spread of only 117 basis points! The Fed’s purchase program, due to expire at the end of the first quarter 2010, has undoubtedly propped up the battered markets. The big concern is if market conditions will be restored to normal, attracting more traditional buyers of MBS before the Fed program expires. We certainly hope so, but many experts believe mortgage rates are likely to jump up by 1% to 1.5% overnight.

Central Coast Lending, Inc.
(805) 771-9870