Continuing economic woes in Europe, coupled with disappointing domestic numbers, prompted interest rates to fall further last week. The yield on the 10-year Treasury bond was hovering at 1.58 percent as I wrote this column.
Strong international demand for Treasury bonds has pushed the yield to unprecedented lows. It’s quite evident that despite the fears of a continued economic slump in the U.S., investors remain convinced the rest of the world’s economies are in worse shape.
Predictably, when I arrived at the office this morning, I found numerous phone messages and emails from clients with pending refinance applications asking about a lower interest rate. While mortgage rates do follow the yield on the 10-year Treasury bond, they are very slow to follow the yield when it is dropping. Conversely, they are very quick to follow it when it rises.
Mortgage rates are low, there’s no doubt about it. From a historical viewpoint, however, mortgage rates should be even lower. The spread between the yield on the 10-year Treasury and the 30-year fixed rate mortgage is wider than it used to be.
Poking around on the Internet, I did a little unscientific research and found that back in 2002 and 2003, the rate on a 30-year fixed-rate mortgage with no points was about 1½ to 2 percentage points above the yield on the 10-year Treasury.
Today, the spread is closer to 2¼ to 2½ percentage points. This means interest rates today would be 0.25 to 0.50 percent lower if the spread was the same as it was a decade ago.
We surely can blame the wider spread on the mortgage meltdown. There is still very little institutional demand for mortgage-backed securities, despite the tightening of credit standards. Unfortunately, the shock of the credit crunch and plunge in property values continue to have far-reaching effects.
I remain astonished at the yield of the 10-year Treasury. A couple of years ago, everyone was certain the debt amassed by the Middle East wars and the subsequent domestic spending by the Obama administration would cause inflation and make interest rates skyrocket. It hasn’t happened. Yet.
Are fixed-rate mortgages headed to 2 percent? I doubt it. But this week I did lock in my first batch of eligible 30-year-fixed zero-cost refinances at 3.875 percent.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to firstname.lastname@example.org.