Nearly four months ago, in late February, the 10-year Treasury yield broke to its lowest level ever, undercutting the record lows from 2016 of 1.32%. Over the following two weeks, as fears surrounding the COVID-19 pandemic intensified, interest rates experienced an unprecedented collapse, with the yield on the 10-year Treasury note eventually trading as low as 0.31% on March 9 (Bloomberg). However, consumers who rushed to refinance loans in mid-March may have been surprised to find that mortgage rates, which typically track the path of longer-term Treasury rates, actually spiked significantly during that time.
So what happened? Well, as stress appeared in nearly every funding market in the world, the average spread, or additional yield relative to risk-free rates, that investors demanded for mortgage-backed securities (MBS) expanded significantly, more than offsetting the decline in longer-term Treasury yields. Since then, as the Federal Reserve (Fed) has stepped in to support numerous areas of the market, including renewing MBS purchases, MBS spreads have declined, while Treasury yields have remained low.
As shown in the LPL Chart of the Day, this confluence of events sent the average rate on a 30-year fixed rate mortgage to its lowest level ever on Friday, at just 3.30%.
“Low mortgage rates may be here for a while,” said LPL Financial Senior Market Strategist Ryan Detrick. “Fed buying is supportive, and spreads remain attractive relative to other quantitative easing periods, which could provide some cushion in the event that Treasury yields rise in the second half of the year.”
For fixed income investors, MBS remains one of our preferred areas for diversification in portfolios, a topic we explored in more depth last month.
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