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Report
Why Mortgage Rates Exceed Treasury Yields
The mortgage spread—the gap between the 30-year fixed mortgage rate and the yield on 10-year U.S. Treasury notes—is currently about 200 basis points, or 2 percentage points. Mortgages and Treasury securities have different cash flows, credit risk, and lender intermediation margins, but even after those differences are accounted for, a large and volatile gap remains. In this brief, the author argues that this remaining gap largely reflects the price of the mortgage prepayment option—a borrower’s right to pay off their mortgage at any time without incurring a penalty.
Journal Article
A Rising Star: The Natural Interest Rate in the Euro Area
The natural rate of interest, also known as r-star, is a key variable for analyzing fiscal and monetary policy. A novel method of measuring this rate for the euro area uses a yield curve model estimated directly on the prices of bonds that are indexed to euro-area inflation. Estimates suggest that the euro-area natural interest rate declined persistently in the two decades before the pandemic but has risen notably in recent years. Projections using this methodology suggest that the rate is likely to increase further, albeit more gradually.
Report
Intermediary Balance Sheets and the Treasury Yield Curve
We have documented a regime change in the U.S. Treasury market post-Global Financial Crisis (GFC). We first derived bounds on Treasury yields that account for dealer balance sheet costs, which we call the net short and net long curves. We show that actual Treasury yields moved from the net short curve pre- GFC to the net long curve post-GFC, consistent with the shift in the dealers’ net position. We then use a stylized model to demonstrate that increased bond supply and tightening leverage constraints can explain this change in regime. This change, in turn, helps explain negative swap ...