Even though the housing market in the United States started on a much stronger footing in the current economic downturn relative to the Great Financial Crisis, low mortgage interest rates remain an effective monetary policy tool to ease the mounting financial strains on households. The Federal Reserve (Fed) responded quickly and forcefully in early March to offset tightening liquidity conditions and lower borrowing costs for consumers and businesses.
As part of the Fed’s commitment to do whatever it takes, the central bank announced plans to purchase any amount of agency mortgage-backed securities (MBS) required to support the economy. The Fed balance sheet holdings of agency MBS holdings today are above $1.8 trillion, an increase of nearly $500 billion since early March.
This week’s chart highlights the relationship between the average 30-year mortgage rate and the 10-year Treasury rate – two rates which have historically tracked closely with each other. However, mortgage rates have failed to keep pace with Treasury yields’ recent move to record low territory. Pandemic-related caps on mortgage lender volumes, uncertainty surrounding new forbearance programs and tighter credit standards for borrowers, especially existing borrowers looking to refinance a mortgage, have all factored into mortgage rates remaining higher than market rates are indicating.
We expect mortgage rates to gradually adjust to Treasury yields’ current record low level as the economy reopens and the full extent of current mortgage forbearance programs is understood. While the hit to household income and employment will be a significant headwind for the housing sector, favorable secular trends, limited supply and declining mortgage rates will help to offset the impact. The MBS sector remains an area where we are finding attractive new investment opportunities with our primary focus on agency guaranteed or AAA-rated assets.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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