'Hidden Force' Can Bring Down Mortgage Rates
Mortgage rates are near 7%, not the expected sub-6%. Rates could fall if the gap between mortgage bonds and Treasury yields narrows. Fed rate cuts may boost demand.
NEW YORK – The benchmark national average 30-year, fixed-rate mortgage is close to 7%, nowhere near the expected sub-6% predicted in early fall 2024. The rise is tied to concerns about accelerating inflation, fewer interest rate cuts by the Federal Reserve, and increases in long-term Treasury yields.
Despite these headwinds, mortgage interest rates could fall. The key factor is the "spread" between current coupon benchmark mortgage bonds and the yield on relevant Treasurys. If this gap narrows closer to 1 percentage point from the current 1.3 to 1.4 percentage points, rates could decline, according to data from Bank of America.
This gap is often considered a "hidden force" behind mortgage rates. The gap widened after the Federal Reserve stopped buying mortgage bonds in 2022. Banks also were not buying as many mortgage bonds.
An FHN Financial mortgage strategists said, "We see 2025 as the year that mortgages will find an equilibrium somewhat tighter than current levels."
Jeana Curro, head of agency mortgage-backed securities strategy at Bank of America, adds, "One overarching theme is that when the Fed steps out, volatility should subside and bring more investors into the market for mortgage bonds."
Pent up demand for mortgage bonds could come from exchange-traded funds and mutual funds. Demand for the mortgage bonds from banks will depend on whether the Fed makes the two cuts investors are expecting this year.
Source: Wall Street Journal (01/08/25) Demos, Telis
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