10 Year Treasury yields are about the same today as yesterday, but mortgage rates plummeted.
The reason?
Mr. Trump announced $200 billion of “quantitative easing” yesterday, focused only on the buying of Mortgage-Backed Securities (MBS).
As a reminder, MBS are the securities created from “pools” of mortgage loans – with MBS “yields” coming from the mortgage payments.
MBS yields are always lower than the average mortgage rate because mortgage rates include other fees (servicing, guarantee fees for Fannie/Freddie, lender margins, etc.).
The spread between MBS yields and the rates for the mortgages supporting the MBS varies from about 1/2% to 1%.
The average mortgage rate today is just under 6.0%, while MBS yields are in the low to mid 5% range, per Grok (a reliable source if there ever was one).
The spread between mortgage rates and MBS rates vs. the benchmark 10 Year Treasury yield has been much higher in recent years because there is less demand for mortgages relative to Treasuries.
But Mr. Trump’s $200 billion of QE announcement has already tightened the spread (pushing mortgage rates closer to 10-Year Treasury yields) – even though the QE has not started yet.
Why I Like This:
- It has already lowered mortgage rates, making homes more affordable, making many more refis viable, and increasing our business. Woohoo!
- The funds to buy the $200 billion are coming from the balance sheets (cash on hand) of Fannie and Freddie – so the Fed is not printing money to buy the MBS, and the government is not borrowing to buy the MBS. When QE funds come from the Fed or the Treasury, QE can spark inflation fears (pushing rates up) – something we have seen in the past.
Why I Hate This:
- Mr. Trump just made housing more affordable for my 31-year-old son who is looking to buy, but he made housing way more expensive for my 26-year-old daughter who is years away from buying. In other words, this is another subsidy of sorts that will just push home prices higher under the guise of making housing more affordable. Prices will simply adjust, offsetting the lower interest rates.
- Free market solutions (fewer regulations and more supply) are always vastly superior to market manipulations by the government. This will simply distort the housing market… again.
- This looks suspiciously like vote buying to me.
Long story short – this is an election year. Hence, Mr. Trump is likely to pull out all of the stops to get rates down, even if the markets overall are not cooperating.
In Monday’s blog, I will discuss numerous other things that can bring rates down even in the face of a strong economy that might otherwise prop rates up.
