Mortgage Spreads and the Yield Curve

Abstract: Mortgage spreads — the 30-year mortgage fixed rate minus the 10-year Treasury rate — have a history of increasing sharply in times of economic stress. While often viewed as a measure of financial stress, I argue they are mostly explained by changes in expected mortgage duration arising from changes in the yield curve. Economic stress leads to a downward-sloping yield curve, which increases expected refinance activity, shortening mortgage durations. This shorter duration makes mortgages prices reflect short (rather than long) Treasury rates. But with a downward-sloping yield curve, this means mortgage rates will be unusually high relative to the 10-year Treasury.

Keywords: mortgage rates; Treasury yield curve; financial stress; mortgage duration;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Richmond Fed Economic Brief

Publication Date: 2023-08

Volume: 23

Issue: 27