Mortgage rates show signs of getting back to normal, suggesting that last week's extraordinary action by the Federal Reserve is having its intended effect. Normally the yield on long-term Treasury debt is a good indicator of where mortgage rates will head. But lately the relationship has broken down. Treasury yields fell while mortgage rates rose.
The difference between the 10-year Treasury yield and the 30-year fixed mortgage rate was about 1.5 percentage points early this year. But in late February the gap started getting wider and eventually yawned far past 2 percentage points. Investors were selling increasingly unpopular mortgage bonds, which makes their yield increase, and buying super-safe Treasury paper. This was frustrating to regulators who hoped lower short-term interest rates would translate into lower mortgage rates. Instead, while the 10-year Treasury fell to a four-year low of 3.36 percent, the 30-year mortgage rose past 6.1 percent.
Now things look better. Last week the 30-year mortgage yield fell back to 5.62 percent, according to Bankrate.com. And investors dumped Treasuries, sending the 10-year yield to 3.34 percent. The spread is still wider than historic readings and wider than policymakers would probably like to see. That represents continuing leeriness about holding mortgage paper. But at least it's moving in the right direction.