San Diego Housing Bubble News and Analysis

HLS I still use the 10 year as a barometer. Perhaps wrongfully so by your post but I am still stubborn. Using the FFR is ridiculous. However I believe that the 10% differential between now and last year between the 10 year bond and the current 30 year mortgages reflects the added premiums that are now needed to move loans on the secondary market.

Indeed over the past 2 weeks the 10 year has moved and so have 30 year rates. So I guess I would say that it is difficult to predict what a 30 year mortgage will be based on what the 10 year treasury is, but I do still very much believe that in a broad sense 30 year mortgages (rates) move up with the 10 year treasury yield moves up.

I know we have jousted over this before and it is always kind of fun!

HLS

The events of the last 12 months have changed things, at least in the short term.

As you know, credit spreads are an indicator of investor sentiment over risk. Spreads on BBB or lower corporates (high yield, junk bonds) have widened dramatically in the last year. During March, even investment grade corporates were sold off in the flight to quality trade (selling all types of credit risk and buying US treasuries).

The 10 year treasury yield touched 3.3% for a little while earlier this year. Investors are slowly starting to buy relatively cheap corporate paper again and selling their risk free treasuries (risk free from a default / credit sense although not free from purchasing power risk).

A similar dynamic occurs in the Mortgage Back Security space. If we look at spreads between the 10 year treasury and 30 year mortgages, I believe you can historically expect about a 180 bps spread. So basically, you would add 1.8% to the 10 year treasury yield. Today that would be roughly 4.25% + 2oo bps = 6.25%.

When the 10 year treasury was yielding 3.3% I don't believe 30 year mortgages hit 5.3%. During that time, investors were still spooked at demanded a higher spread to compensate them for the risk.

I would still use the 10 year as a reliable indicator for 30 year mortages along with current credit market conditions.

SD, it's still an OK barometer on day to day moves, but not foolproof. You cannot assume the 30 YR rate by where the 10 YR is. Will see if the 2008 spread holds or widens.

Point agreed that I don't think we will see a huge move up in the 10 YR and a drop in the 30 YR.

My point was that when the FED cuts rates, many think that 30 YR rates will go down. The FFR is now 325 bps lower and 30 YR rates are back where they were before the first cut last summer.

If the 10 YR gets back to 5% or above, I imagine that 30 YR rates will be considerably higher than 6.25%

Payments on a $417K loan are now much higher than just several months ago.

In January, 30 YR fixed were at 5.25% for a few days, and were at 5.375% in January and in March...
They have been below 5.875% most of this year.

Is it up up and away or back into the 5's ?? I DUNNO.

I saw a post on calculated risk where they had run a regression on the 30 year fixed mortgage vs. the 10 yr bond. Dont remember the R^2, but the fit looked plenty good for me to take it to the bank as a heuristic.

Stan

The FFR only affects or tries to affect the short end of the bond curve. When the short end rises it puts the pressure on the Fed to raise in line.