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.
