This week’s Chart of the Week examines the spread between the 30-year fixed mortgage rate and 10-year Treasury yield. Between 1990 and 2021, the spread averaged around 170 basis points, but starting in 2022, this spread widened dramatically, exceeding 300 basis points in some weeks (the chart shows the data in monthly averages). This widening was driven by rate volatility, rapidly accelerating inflation, expectations of rate hikes from the Fed, and various factors causing an increase in MBS supply, including the Fed’s balance sheet runoff and sales of MBS holdings from failed banks. Treasury yields increased by around 300 basis points between early 2022 and late 2023, but mortgage rates increased by over 400 basis points due to the wider spread, reaching weekly averages of close to 8 percent.
The spread narrowed in late 2023, as inflation seemed to cool and the Fed pivoted to discussing rate cuts instead of further rate hikes. However, inflation data to start 2024 showed that the job was far from done, and the spread stayed in the range of 250 basis points. Longer-term rates have settled slightly following recent data releases, notably the April jobs and inflation reports, with 10-year Treasury yields in the region of 4.5 percent, and 30-year mortgage rates are back around 7 percent.
Our forecast has the 10-year yield declining close to 4 percent by the end of 2024, as inflation continues to cool and economic growth returns closer to trend. We expect the spread will tighten over the forecast horizon. Still we may not return to historical averages as the Fed plots the next phases of reducing its balance sheet holdings. The combination of these factors implies a 30-year fixed mortgage rate closer to 6.5 percent by the end of 2024 and staying in the 6 percent range for most of 2025.
–Mike Fratantoni and Joel Kan