Houston's Rate Sheet

Mortgage Wars

Holden Lewis, Bankrate.com's resident blogger has an interesting article about the unusual goings on in the mortgage markets. As I posted yesterday, mortgage rates are down on the week as Treasury yields are going up. This is very unusual because these two securities typically move in the same direction. Holden's theory is that there must be a bidding war in the mortgage markets and this is bound to end eventually. So he reccomends locking rates, because you don't want to get caught on the back end of this battle. Here's Holden's post:

MORTGAGEY WEIRDNESS: I think you should lock your mortgage rate. Something is going on in the mortgage world -- maybe a price war. And wars end sooner or later.

Bankrate conducts its mortgage rate survey every Wednesday, and this week's survey found that the 30-year fixed fell for the second week in a row, to 6.27 percent. The signs pointed toward a rise, not a fall.

Let's compare Wednesday to the previous Wednesday -- March 1 to Feb. 22.

On Feb. 22, the 10-year Treasury yielded 4.53 percent. On March 1, the 10-year yielded 4.59 percent. On Feb. 22, one of Freddie Mac's required net yield was 6.01 percent. On March 1 it was 6.08 percent. The required net yield is sort of like the wholesale price of a loan.

To recap, the 10-year Treasury yield went up 6 basis points and the Freddie required net yield went up 7 basis points, but the average rate on a 30-year fixed fell 7 basis points. Mortgage rates and bond yields usually move in the same direction.

Let's look at the difference, or spread, between the 10-year Treasury yield and the average 30-year mortgage rate. This week it was 1.68 percent; last week it was 1.81 percent. At the beginning of 2006, the spread was 1.92 percent. A spread of 1.68 is narrow. It has dropped that low twice since October, and both times it snapped back within a couple of weeks to 1.75 or higher.

As I write this, the 10-year yield is 4.64 percent. If the 30-year fixed were 1.75 percentage points higher than the 10-year Treasury yield, it would be 6.39 percent right now -- an eighth of a percentage point higher than the benchmark 30-year fixed in this week's Bankrate survey.

The spread between the 10-year Treasury and the 30-year fixed probably will widen in the next two or three weeks; if that happens, mortgage rates will rise unless Treasury yields fall.

posted by Vincent Biondillo @ 2:54 PM