AP

Mortgage rates’ rise has led to wide gap with US bond yields

Dec 28, 2022, 8:42 PM | Updated: Dec 29, 2022, 1:11 pm

FILE - A cul-de-sac runs through a new housing development in Middlesex Township, Pa., on Oct. 12, ...

FILE - A cul-de-sac runs through a new housing development in Middlesex Township, Pa., on Oct. 12, 2022. The sharp rise in borrowing costs that helped torpedo the U.S. housing market in 2022 has been partly driven by a wider-than-usual divergence between long-term mortgage rates and the yield on the benchmark U.S. government bond. (AP Photo/Gene J. Puskar, File)

(AP Photo/Gene J. Puskar, File)

LOS ANGELES (AP) — Economists are baffled by a wider-than-usual divergence between long-term mortgage rates and the yield on the benchmark U.S. government bond that is driving a sharp rise in borrowing costs and helping to torpedo the U.S. housing market this year.

The gap, or spread, between the 10-year Treasury yield and the average rate on a 30-year mortgage widened this year as inflation hit the highest level in decades and the Fed began raising interest rates and taking other steps aimed at taming surging prices.

This spread has historically averaged around 170 basis points a month, but between March and October it averaged about 240 basis points, according to Federal Reserve data. In October, the spread widened to 292 points, the biggest monthly gap since August 1986.

“The spread between the 10-year Treasury and the mortgage rate is exceptionally wide, abnormal,” Lawrence Yun, chief economist for the National Association of Realtors said last week. “If we had a narrowing, or say, a normal spread condition, today’s mortgage rate could be 5.7%.”

Mike Fratantoni, chief economist at the Mortgage Bankers Association, agreed: “One of the more puzzling aspects of the current environment has been the extremely wide spread of mortgage rates relative to Treasury rates.”

Rates for 30-year mortgages usually track the moves in the 10-year Treasury yield, which lenders use as a guide to pricing loans. Investors’ expectations for future inflation, global demand for U.S. Treasurys and what the Federal Reserve does with interest rates can also influence the cost of borrowing for a home.

In the first week of January, when the 10-year Treasury yield averaged 1.77% and the rate on a 30-year mortgage averaged 3.22%, the spread was 145 basis points.

In the months that followed, as bond yields shot upward and mortgage rates doubled from 2021 levels, that spread increased. Last week, it was 252 basis-points wide as the 10-year Treasury yield averaged 3.75%, while the 30-year home loan rate averaged 6.27%.

And as recently as the second week of November, the spread swelled to 326 basis points as the weekly average on a 30-year mortgage climbed to a 20-year high of 7.08%.

The spread between mortgage rates and the 10-year Treasury yield has widened sharply in the past, generally in periods preceding or coinciding with recessions, as in 2000-2001 and 2008-2009, said George Ratiu, manager of economic research at Realtor.com.

Several factors are driving the wider-than-normal spread. Inflation and the Fed’s wave of rate hikes has pushed up costs for banks, which are then passed along to borrowers with higher rates.

Earlier this year, the Fed also began reducing its holdings of Treasury and mortgage-backed securities, or MBS.

“What that means, practically, is there’s less money in the lending market to actually reach consumers,” Ratiu said. “That also has an upward effect on mortgage rates.”

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

moore redmond washington...

Associated Press

U.S. Supreme Court rules against Redmond couple challenging foreign income tax

The court ruled in the case of Charles and Kathleen Moore, of Redmond, Washington after they previously challenged a $15,000 tax bill.

8 hours ago

Image:The New York Giants' Willie Mays poses for a photo during baseball spring training in 1972. M...

Associated Press

Willie Mays, Giants’ electrifying ‘Say Hey Kid,’ dies at 93

Willie Mays, whose singular combination of talent, drive and exuberance made him one of baseball’s greatest players, has died. He was 93.

2 days ago

Image: This photo provided by the Washington Department of Ecology shows a derailed BNSF train on t...

Associated Press

Judge orders BNSF to pay Washington tribe nearly $400M for trespassing with oil trains

BNSF Railway must pay the sum to a Native American tribe in Washington after it ran 100-car trains with crude oil on the tribe's reservation.

3 days ago

Photo: In this photo provided by Tieanna Joseph Cade, an amusement park ride is shown stuck with 30...

Associated Press

Crews rescue 28 people trapped upside down high on Oregon amusement park ride

Emergency crews in Oregon rescued 28 people after they were stuck dangling upside down high on a ride at a century-old amusement park.

3 days ago

juneteenth shooting texas...

Associated Press

2 killed and 6 wounded in shooting during a Juneteenth celebration in a Texas park

A shooting in a Texas park left two people dead and six wounded, including two children, on Saturday, authorities said.

4 days ago

Photo: Israeli soldiers drive a tank near the Israeli-Gaza border, in southern Israel, Wednesday, J...

Jack Jeffery, The Associated Press

8 Israeli soldiers killed in southern Gaza in deadliest attack on Israeli forces in months

An explosion in Gaza killed eight Israeli soldiers, the military said Saturday, making it the deadliest attack on Israeli forces in months.

5 days ago

Mortgage rates’ rise has led to wide gap with US bond yields