Refinance Rates Tumble With Falling Treasury Yields
Posted by: real estate / Category: Mortgage RefinanceThere is no doubt that the United States and global economies have experienced a severe downturn in 2008. The US stock market alone has dropped over 40 percent from the prior 12-month period high level. During this historic drop in the equity prices, we have witnessed dramatic daily buying and selling surges in the stock market, which has led to volatility for mortgage refinance rates as treasury yields jump along the market moves.
Refinance rates are made up of two major component parts, the first being the 10-Year Treasury yield added to the second component, lender mortgage risk spread premium. So, as the Treasury yield falls, mortgage refinance rates normally follow. Typically, as money moves out of the stock market, investors and hedge funds look for a place to park their cash in a liquid and safe investment that will also provide some sort of profit yield, such as the 10-Year Treasury bond. As more and more market players buy these bonds, the price goes up, but the yield drops as it has an inverse reaction to bond price. The recent stock market panic and decline bears out how this relationship fits together. On November 13, 2008, the S&P 500 closed the day at 911.29, and the 10-Year Treasury Yield at 3.82%. Fast forward only one week later and the S&P 500 closed at 752.44, and the 10-Year yield at 3.14%. This is a real life and dramatic example reflecting panic selling in the stock market and the flight to safety in bonds. The one-week drop of .68 percent in the 10 Year yield resulted in an average of up to a direct one-half percent drop in mortgage refinance rates! Normally, the stock market and bonds do not trade as dramatically as the previous example reflects, in such a short amount of time, but it surely does reveal the relationship between refinance rates and the Treasury yield.
Now you might be wondering why the mortgage refinance rates only dropped up to .50 percent when the bond yield fell by .68 percent. That is where the mortgage risk spread premium enters the picture. The spread accounts for the profit margin that lenders require in funding home loans, and will increase in times of higher market risk. Recent stock market actions along with a continuation of declining home prices is driving up the risk factor for lenders and resulting in a current high mortgage spread factor. In fact, if mortgage spreads were at historical levels, we would be experiencing rates on 30-Year fixed mortgages at 5 percent and lower!
Check out an Refinance Rates at the Refinance ToolBox . Visit today for Refinancing Lenders information and current rate quotes.
Jim_Bisnett
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