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Treasury Yields Have Fallen. Why Haven't Mortgage Rates Followed?

BIZ & TECH // NET WORTH - KATHLEEN PENDER

Treasury yields have fallen to record lows. Why haven’t mortgage rates followed?

Kathleen Pender March 3, 2020 Updated: March 3, 2020 2:36 p.m.

The yield on the 10-year Treasury has plunged to record lows — dipping below 1% for the first time on Tuesday — as panic selling in stocks has led to panic buying in bonds. But mortgage rates, which typically follow the 10-year note yield, have barely budged.

The average rate on a 30-year fixed-rate mortgage was 3.45% for the week ending Thursday, down a wee bit from 3.49% the previous week and 3.47% the week before that, according to Freddie Mac. It’s still above the record low (since 1971) of 3.31% set in 2012.

The 10-year Treasury yield, meanwhile, plunged from 1.63% on Feb. 12 to a record closing low of 1.15% on Friday, according to Bloomberg data. The yield continued hitting record lows this week. It sank as low as 0.91% intraday on Tuesday after the Federal Reserve cut the short-term federal funds rate by 0.5 percentage point in an emergency move aimed at limiting economic fallout from the coronavirus. It settled just above 1%.

Interest rates are all about supply and demand. Last week, as stocks fell more than 10% in their swiftest correction in history, investors worldwide were piling into the perceived safety of U.S. Treasurys. That pushed their prices up and their yields, which move in the opposite direction, down.

But those same buyers were not necessarily buying mortgage-backed bonds, which help set the direction of mortgage rates, said Keith Gumbinger, a vice president with HSH.com, a mortgage website. Mortgage bonds “are not nearly as liquid” as Treasury bonds, and thus not as easy to buy during a panic and dump later.

Although Treasury and mortgage yields are closely aligned, “it’s not a perfect lockstep relationship,” he said.

The trade publication Inside Mortgage Finance “contacted a bunch of lenders,” said Guy Cecala, the publisher. “They said they expect to see the rates come (down) by the end of the week. They act like it’s going through the system and it’s not their decision,” which it is, he said.

Mortgage rates are typically about 1.5 percentage points higher than the 10-year Treasury yield, so a 1% Treasury yield would correspond to a 2.5% mortgage rate, Cecala added. He’s not expecting to see mortgage rates get that low, but “by the end of this week, we are going to see a lot of lenders offering rates at 3.25%, perhaps a even a little lower.”

Wells Fargo’s 30-year-fixed rate mortgage has been “within 0.125% of 3.5% ... for the last few weeks. We do look at our rates on a regular basis but can’t speculate about what changes we may make,” Wells spokesman Tom Goyda said in an email.

Lenders have reasons to keep mortgage rates somewhat higher than the Treasury market would dictate.

If the coronavirus sends the economy into a tailspin, they might not see this as the best time to be making 30-year home loans. Right now, mortgage defaults and delinquencies are near all-time lows, “similar to where they were in 2003-04,” Gumbinger said. At that time “everyone said these things never default, we can do anything and there is no risk. That is part of what led” to the financial crisis.

Lenders “might want to give themselves a little bit of a buffer here,” said Mark Hamrick, a senior economic analyst for Bankrate.com.

Sometimes mortgage rates react “immediately” to changes in Treasury yields, but keeping mortgage rates where they are for a bit “can generate some profit” for lenders, he said. Hamrick added that mortgage companies might worry about their ability to handle a crush of new mortgage applications if rates suddenly sink.

It’s also possible that the Treasury mania could be short-lived. In that case, “we may not get to the 2012 lows” in mortgage rates this week, Gumbinger said.

If rates do keep falling, some homeowners may want to refinance their mortgages. However, rates have been so low for so long, it might not be worth it for many people. “We have had rates within a percentage point of where we are now for about seven years,” Gumbinger said.

Refinancing has costs. Normally, “you need to save one percentage point” on the rate to make it worthwhile over three to five years, he said. The longer you plan to stay in your home, the smaller the difference needs to be.

Because mortgages are longer-term loans, they are less sensitive to changes in short-term rates, such as the federal funds rate, than they are to the 10-year Treasury yield. In normal times, short-term rate cuts can indirectly filter down to lower mortgage rates.

But this time around, “if a Fed rate cut leads to a rebounding stock market,” that could lead to higher mortgage rates if investors leave the bond market for the stock market, Cecala said. That being said, the Dow Jones industrial average fell almost 1,000 points intraday on Tuesday after the Fed announced the rate cut. It closed at 25,917.41, down 785.91 points or 2.94%.

Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender

BIZ & TECH // NET WORTH - KATHLEEN PENDER

Treasury yields have fallen to record lows. Why haven’t mortgage rates followed?

Kathleen Pender March 3, 2020 Updated: March 3, 2020 2:36 p.m.

The yield on the 10-year Treasury has plunged to record lows — dipping below 1% for the first time on Tuesday — as panic selling in stocks has led to panic buying in bonds. But mortgage rates, which typically follow the 10-year note yield, have barely budged.

The average rate on a 30-year fixed-rate mortgage was 3.45% for the week ending Thursday, down a wee bit from 3.49% the previous week and 3.47% the week before that, according to Freddie Mac. It’s still above the record low (since 1971) of 3.31% set in 2012.

The 10-year Treasury yield, meanwhile, plunged from 1.63% on Feb. 12 to a record closing low of 1.15% on Friday, according to Bloomberg data. The yield continued hitting record lows this week. It sank as low as 0.91% intraday on Tuesday after the Federal Reserve cut the short-term federal funds rate by 0.5 percentage point in an emergency move aimed at limiting economic fallout from the coronavirus. It settled just above 1%.

Interest rates are all about supply and demand. Last week, as stocks fell more than 10% in their swiftest correction in history, investors worldwide were piling into the perceived safety of U.S. Treasurys. That pushed their prices up and their yields, which move in the opposite direction, down.

But those same buyers were not necessarily buying mortgage-backed bonds, which help set the direction of mortgage rates, said Keith Gumbinger, a vice president with HSH.com, a mortgage website. Mortgage bonds “are not nearly as liquid” as Treasury bonds, and thus not as easy to buy during a panic and dump later.

Although Treasury and mortgage yields are closely aligned, “it’s not a perfect lockstep relationship,” he said.

The trade publication Inside Mortgage Finance “contacted a bunch of lenders,” said Guy Cecala, the publisher. “They said they expect to see the rates come (down) by the end of the week. They act like it’s going through the system and it’s not their decision,” which it is, he said.

Mortgage rates are typically about 1.5 percentage points higher than the 10-year Treasury yield, so a 1% Treasury yield would correspond to a 2.5% mortgage rate, Cecala added. He’s not expecting to see mortgage rates get that low, but “by the end of this week, we are going to see a lot of lenders offering rates at 3.25%, perhaps a even a little lower.”

Wells Fargo’s 30-year-fixed rate mortgage has been “within 0.125% of 3.5% ... for the last few weeks. We do look at our rates on a regular basis but can’t speculate about what changes we may make,” Wells spokesman Tom Goyda said in an email.

Lenders have reasons to keep mortgage rates somewhat higher than the Treasury market would dictate.

If the coronavirus sends the economy into a tailspin, they might not see this as the best time to be making 30-year home loans. Right now, mortgage defaults and delinquencies are near all-time lows, “similar to where they were in 2003-04,” Gumbinger said. At that time “everyone said these things never default, we can do anything and there is no risk. That is part of what led” to the financial crisis.

Lenders “might want to give themselves a little bit of a buffer here,” said Mark Hamrick, a senior economic analyst for Bankrate.com.

Sometimes mortgage rates react “immediately” to changes in Treasury yields, but keeping mortgage rates where they are for a bit “can generate some profit” for lenders, he said. Hamrick added that mortgage companies might worry about their ability to handle a crush of new mortgage applications if rates suddenly sink.

It’s also possible that the Treasury mania could be short-lived. In that case, “we may not get to the 2012 lows” in mortgage rates this week, Gumbinger said.

If rates do keep falling, some homeowners may want to refinance their mortgages. However, rates have been so low for so long, it might not be worth it for many people. “We have had rates within a percentage point of where we are now for about seven years,” Gumbinger said.

Refinancing has costs. Normally, “you need to save one percentage point” on the rate to make it worthwhile over three to five years, he said. The longer you plan to stay in your home, the smaller the difference needs to be.

Because mortgages are longer-term loans, they are less sensitive to changes in short-term rates, such as the federal funds rate, than they are to the 10-year Treasury yield. In normal times, short-term rate cuts can indirectly filter down to lower mortgage rates.

But this time around, “if a Fed rate cut leads to a rebounding stock market,” that could lead to higher mortgage rates if investors leave the bond market for the stock market, Cecala said. That being said, the Dow Jones industrial average fell almost 1,000 points intraday on Tuesday after the Fed announced the rate cut. It closed at 25,917.41, down 785.91 points or 2.94%.

Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender

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Licensed by the California Department of Real Estate
License number 00685309
NMLS number 338105
Licensed by the California Department of Real Estate
License number 00685309
NMLS number 338105