30yr mortgage/10yr note spread

The 30yr mortgage/10yr note spread was trading at 167bp as of Friday’s close. On average since 1980, the spread between the note and a standard mortgage rate has run at a slightly wider, 179bp with a 53bp standard deviation.

However that may overweight the volatility seen in the early to mid ‘80s real estate boom. If we take a look at the last 15 years, the average spread narrows 10% to just 160bp, and the standard deviation falls by half to 30bp. This puts the current spread slightly wider than average, but not significantly so. Much of that widening was due to the sharp pullback in the note that took place last week.

Roughly 28% of mortgages today are being sold with adjustable rates. In the past year 1yr ARMs have seen a 91bp move higher vs. the increase in the fixed rate product. This fact in combination with the pullback in the housing market overall suggests that the mortgage market is more dependent on the movements at the long end of the curve than at the short end. It also tells us two things about where mortgages and thus home sales are going, one resistance in both indexes is near, and two that if the note does break over this resistance yield mortgage traders will be in rebalancing with a vengeance. Both of these key levels lie at 4.80 in the note.

If the note does break over 4.80 we see the next significant level of yield resistance nearer to 5.50%. Even assuming the spread shits back to its lower 110bps level, it still suggests a 6.60% rate on a 30yr mortgage. (Man Financial)