Mortgage rates are influenced not only by the 10-year bond yield but also by the spread between the 10-year yield and the actual mortgage rates offered on the street.

The spread between 30-year mortgage rates and 10-year Treasury yields has remained elevated in recent years, peaking at 2.96% in June 2023.

Now, not only are mortgage rates declining, but the spread between mortgage rates and bond yields is also tightening.

Why does this spread increase? It all comes down to risk. When interest rates rise, the likelihood of future declines grows. If borrowers refinance too quickly, it impacts the long-term return on those mortgages, affecting both lenders and servicers.

To mitigate this risk, mortgage rates are set higher relative to bond yields, creating a buffer against potential refinancing. A higher rate means more interest paid upfront, helping offset future losses.

Rates are dropping as is the differential. Its a positive double whammy.

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