Fixed Income Charts — June 1, 2020

US Mortgages: Low Rates and High Risk

Chart Highlights

  • US mortgage and treasuries rates are at historic lows following the market’s reaction to the COVID-19 crisis and the Federal Reserve’s action to address this.
  • However, the spread between the 30-year fixed agency mortgage rate and the 10-year constant maturity treasury rate is close to its highest level since the mid-1980s, surpassed only by the spread at the end of 2008 during the Global Financial Crisis, and 80 bp higher than a year ago.
  • While equities and corporate credit spreads have substantially recovered since their extremes in mid-March, high mortgage spreads have persisted through the end of May, with a period of 10 weeks over 250 bp.
  • Although the agency mortgages are implicitly guaranteed against default, great uncertainty exists around the impact of the crisis on prepayments driven by delinquencies, refinancings, and relocations.
  • Historic unemployment, massive additional government spending, Fed asset purchases, and an uncertain housing market have produced historically low mortgage rates and rarely seen mortgage-treasury spreads.

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