The 10 year US Government Treasury Note dropped to historic lows of just over 2% last week. A year ago, the rate was over 4%, double the current rate, and has been as high as 6.77% this decade.
Unless you’re a risk-averse investor buying such bonds, you probably don’t know or care about the 10 year Treasury rate. However, mortgage rates parallel the 10 year Treasury.
Normally, the spread between the 10 year Treasury and the fixed conventional 30 year mortgage is 1.6%, according to Professors Hubbard and Mayer, in the December 17, 2008 Wall Street Journal. The mortgage market isn’t operating properly (Fannie and Freddie were nationalized in September, which is as far from normal as you can get). And, spreads between Treasuries and mortgages are closer to 3%.
The professors argue that if the spread diminishes and mortgage rates fall to 4.5% then housing prices should be stable or even increase in 2009. Let’s hope for 4.5%.