On Friday, the 10 year Treasury note fell to its lowest level since September 2005, 4.01%. Typically 30 year fixed mortgages are tightly associated with the 10 year note. As the 10 year Treasury moves, so does the mortgage rate. But the gap between these two rates have widened substantially in June the difference between the 10 year and 30 year fixed mortgage was 2.22% last week as opposed to just 1.52% in June.
Why Did They Move Together To Begin With?
The reason they move together is because of perceived risk. Treasury Notes are considered very safe investments. The Federal government has never defaulted on its bonds. Investors in mortgage backed securities assumed the same. They thought people basing a security on individuals paying their mortgage in a timely fashion was a very secure investment.
Why Is The Spread Getting Wider?
Uh…well…not so much. With a foreclosure nightmare occurring right now, these mortgage backed securities are nowhere nearly as safe as the 10 year Treasury. As a result the spread has widened siginificantly! Risk = reward.
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