The unusually wide “spread” between 10-year Treasury yields and 30-year fixed-rate mortgages means mortgage rates could have more room to come down.

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Worries about the banking system and the economy brought mortgage rates down again last week and boosted homebuyer demand for purchase loans for the third week in a row, according to a weekly survey of lenders by the Mortgage Bankers Association (MBA).

The MBA’s Weekly Mortgage Applications Survey shows requests for purchase mortgages were up a seasonally adjusted 2 percent last week but were down 36 percent from a year ago. Requests to refinance were up 5 percent from the previous week but down 68 percent from a year ago.

Joel Kan

“Both purchase and refinance applications increased for the third week in a row as borrowers took the opportunity to act, even though overall application volume remains at relatively low levels,” MBA Deputy Chief Economist Joel Kan said in a statement.

Rates on 30-year fixed-rate conforming mortgages hit a 2022 high of 7.16 percent on Oct. 24 before briefly retreating below 6 percent in the new year, according to loan lock data tracked by Optimal Blue.

But after hitting a 2023 low of 5.98 percent on Feb. 2, rates started climbing again on worries that the Federal Reserve will have to continue hiking rates to fight inflation.

Mortgage rates looked like they were headed past 7 percent again in early March. But after hitting a 2023 high of 6.84 percent on March 8, the failures of Silicon Valley Bank and Signature Bank helped bring rates back down, as investors seeking safety piled into investments like Treasurys and, to a lesser extent, mortgage-backed securities (MBS).

Rates have been on the upswing since March 17 as investors weigh the odds that the banking crisis has been contained, and that Fed policymakers will continue raising short-term rates to fight inflation.

The Federal Open Market Committee voted unanimously Wednesday to raise the federal funds rate by 25 basis points to a target range of 4.75 percent to 5 percent. Policymakers said “some additional policy firming may be appropriate” to keep inflation in check but that future hikes will depend on inflation data.

Investor demand for bonds and mortgage-backed securities pushes prices up and yields down. But mortgage rates have not dropped as much as Treasury yields due to increased MBS market volatility, Kan said.

The “spread” between 10-year Treasury yields and 30-year fixed-rate mortgage rates is typically 180 basis points, Kan noted, meaning mortgage rates are ordinarily about 1.8 percentage points higher than 10-year Treasury yields. But the spread has grown to 300 basis points, meaning mortgage rates are about 3 percentage points higher than 10-year Treasury yields (a basis point is one-hundredth of a percentage point).

With payments to investors guaranteed by Fannie Mae and Freddie Mac, “agency” mortgage-backed securities are considered relatively safe from default. But rising interest rates can undermine the market value of government bonds and agency MBS — an issue that proved to be Silicon Valley Bank’s undoing.

Volatility in the spread between 10-year Treasury yields and 30-year fixed-rate mortgages is usually short-lived, however, meaning mortgage rates could have more room to come down if Treasury yields level out.

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Email Matt Carter

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