The Federal Reserve cut rates by 50 basis points yesterday, but since then, the US 30 year mortgage rate has moved up six basis points to 6.17%.
Of course the Fed funds rate is a shorter-term overnight lending rate that the Fed targets in its monetary policy.
Meanwhile, mortgage rates are more closely tied to the 10-year yield. The 10 year yield is currently up 5.4 basis points on the day at 3.741%. Yesterday that yield was also up modestly.
Why didn't the 10-year yield move lower?
There are couple reasons:
- 10 year yields since October 2023 already move them from 5.02% to a low this week 3.60%. That is a decline of 142 basis points
- The economic data today was stronger than expected with initial jobless claims falling to 219K vs 230K estimate.
Looking at the 30-year mortgage, it peaked near 7.8% back in October 2023. The fall to 6.17% currently is a decline of around 163 basis points.
So compared to the 10-year yield fall over the same time period, the 30 mortgage has actually fallen more (163 basis points versus 142 basis points).
Does that mean mortgage interest rates will continue to move higher. Not necessarily. The spread to of the mortgage to the 10 year yield can flucuate.
With the 10 year yield at 3.741%. The 30 year mortgage is 6.11%. The spread is 237 basis points.
Generally speaking, the historical spread between the 30-year mortgage rate and the 10-year yield has varied over time, but here are some general trends and averages:
Long-term average: The average spread between the 30-year mortgage rate and the 10-year yield from 1971 to 2022 is around 170-180 basis points (bps).
Pre-2008: Before the financial crisis, the spread was generally around 100-150 bps.
Post-2008: After the financial crisis, the spread widened to around 200-250 bps due to increased market volatility and liquidity concerns.
2020-2022: During the COVID-19 pandemic, the spread narrowed to around 100-150 bps, driven by the Federal Reserve's accommodative monetary policy and the resulting decline in long-term interest rates.
At 237 basis points currently, it is in the wider band from a historical perspective.
So let's say the spread moved to 200 basis points with the 10 year at current levels. that would shave the 30 year mortgage rate down to 5.74%. That would help affordability problems for some additional home buyers.
Note to politicians....If you want to kick start the housing market, encourage the banks to bring the spread down. At 200 basis points it is still above the longer term average around 170-180 basis points, , but below the higher - more newer - spread range between 200 and 250 basis points.