It has been a good couple of weeks for mortgage rates that take advantage of a delay on customs duties and some favorable financial data.
Between a declining economy, reduced inflation and the idea that the tariffs could be excessive, the 10-year bond yield has improved significantly.
Since it hit its highest 2025 at 4.81% on January 13, it has since fallen a significant 35 base point in less than a month.
This is driven by cooler inflation/economic data and less fear of customs duties and a wider trade war.
However, mortgage loans have not fallen with the same amount that tells you that there is still a lot of defense ability at pricing.
Mortgage lenders remain defensive by pricing
The 10-year bond yield is a great way to track priority rates, with the 30-year-old fixed movement in relative lockstep over time.
However, over the past few years, the priority interest rates (Premium MBS investors have been demanding) increased significantly.
In large parts of this century, since at least the year 2000, the spread has hinted an average of about 170 basic points.
At the end of 2023, it expanded to about 300 basic points (BPS), which means investors demanded a full 3% spread over comparable treasuries, as seen in the diagram above from Fitch rating.
This was largely driven by prepayment risk and to some extent credit risk, such as breach of loans.
But my guess is that it has mostly been prepayments that MBS investors fear, because mortgage rates almost tripled about a year’s time.
In other words, the idea was that these mortgage loans would not have much of a durability and would be refinanced before rather than later.
The spread has since come a little, but is still about 260 bps, which means it is almost 100 bps over its long -term average.
In short, pricing remains very careful compared to the norm and it has gotten worse in the last few weeks.
The spreads were actually getting closer to the lower 200 BPS level before they climbed again recently.
Is there too much volatility for a flight to safety?
As for why, I would guess increased uncertainty and volatility. After all, both Canada and Mexico faced Customs last week before they were “delayed.” But customs in China is still in effect.
While the market generally cheered this development, who should it say that it is not flip-flop in a week?
The same goes for all government agencies that are suspended or shut down, or the acquisitions given to federal employees.
Due to the lack of a better word, there is a lot of chaos out there at the moment that did not offer priority rates.
They say there is a flight to security when the stock market and a wider economy are unstable or fleeting, where investors ditch stocks and buy bonds.
This increases the price of bonds and lowers their dividends, alias interest rates. This is also good for mortgage rates based on the same principle.
But there is a certain point where conditions are so unstable that both bonds and stocks become defensive at the same time.
Both can sell, and no one really benefits from the fact that consumers who see the wealth effect fall while also facing higher interest rates.
[Mortgage rates vs. the stock market]
The 30-year-old fast could be in the low 6s today
The big question is when can we see some stability in the bond and MBS market, which allows spreading to finally enter?
Some say that the 10-year dividend of about 4.50% today is quite reasonable considering the current financial conditions.
If it comes to more or less residence set, the only other way to get mortgage rates is lower via spreading compression.
We know that the spreads are bloated and have room to come down, so that is what will be necessary to prevent a contrary economy or much worse unemployment that drives lower.
Assuming that spreads were even close to their recent norms, says 200 basic points over the 10th anniversary, we already had a 6.5% 30-year-old fixed. Maybe even a 6,375% rate.
Those who chose to pay discount points could probably get a rate that started with a “5” and who would not be half bad for most new home buyers.
It would also be pretty appealing for those who bought a home at the end of 2022 to 2024, which may have an interest on Say 7 or 8%.
In other words, there are plenty of options just a tighter spread away. Much of the heavy lifting has already been done in combating inflation.
So if we can get there, borrower relief is on the way. And mortgage lenders who have needed water and hardly survived over the past few years may also be saved.
We just need clearer messages and politics from the new administration that allow investors to leave their overly defensive attitude.
Before creating this site, I worked as a banking director of a wholesale loan in Los Angeles. My practical experience in the early 2000s inspired me to start writing about mortgage loans 19 years ago to help potential (and existing) home buyers better navigate the home loan process. Follow me on Twitter for Hot Take.
