Mortgage Spreads: A Hidden Lever to Ease Rates Lower

Mortgage spreads, the difference between mortgage interest rates and the yield of the 10-year U.S. Treasury, have a significant impact on the housing market and broader economy. Understanding the dynamics of mortgage spreads can provide valuable insights for investors and lenders alike. This article explores the role of mortgage spreads and how they can help ease mortgage rates lower.


Mortgage spreads are influenced by changes in expected mortgage duration and yield curve dynamics. When the yield curve inverts, it shortens the expected duration of mortgages, making them more sensitive to short-term interest rates. This phenomenon, known as the mortgage duration effect, drives up the 30-year mortgage spread relative to the 10-year Treasury (T10). As a result, mortgage interest rates can become unusually high relative to the T10 during economic stress.


Risk-averse lenders play a crucial role in widening mortgage spreads during economic stress. As lenders become more risk-averse, they demand higher spreads to compensate for the increased risk. This dynamic further exacerbates the mortgage spread, making it more challenging for borrowers to secure affordable mortgages.

However, investors and lenders can capitalize on the mortgage duration effect to ease mortgage rates lower. By anticipating changes in the yield curve and adjusting their lending strategies accordingly, lenders can offer more competitive mortgage rates. This can be achieved by:

1. Monitoring the yield curve: Lenders should closely track changes in the yield curve to anticipate shifts in expected mortgage durations. As the yield curve inverts, lenders can adjust their lending criteria and pricing to reflect the shorter duration of mortgages.
2. Offering flexible refinancing options: Lenders can provide borrowers with the opportunity to refinance their mortgages at lower rates as the yield curve normalizes. This can help borrowers reduce their monthly payments and improve their financial situation.
3. Encouraging mortgage-backed securities (MBS) investment: Investors can support the housing market by purchasing MBS, which can help lower mortgage rates. As demand for MBS increases, the spread between mortgage securities and Treasury yields narrows, making mortgages more affordable.

In conclusion, mortgage spreads play a vital role in determining mortgage interest rates and the overall health of the housing market. By understanding the mortgage duration effect and the influence of risk-averse lenders, investors and lenders can capitalize on these dynamics to ease mortgage rates lower. Monitoring the yield curve, offering flexible refinancing options, and encouraging MBS investment are key strategies for achieving this goal.