Thus, the coronavirus led to a rapid decline in global economic activity. While COVID-19 left a brutal impact on the stock market, it positively affected bonds. By proxy, the coronavirus pushed mortgage rates to record-low levels.
Coronavirus Impact on Mortgage Rates vs. Treasury Bonds
As investors study the coronavirus impact on mortgage rates, they raise a common question. Why haven’t mortgage rates fallen as much as government Treasury yields? Overall, there are two primary reasons for this trend.
First, mortgage-backed securities (MBS) contain prepayment risk while Treasuries do not. When people refinance, their loans are removed from mortgage-backed securities. In doing so, mortgage-backed securities decline in value during periods of increases. Put simply, mortgage rates rise and fall more slowly than Treasury yields due to the basic properties of prepayment risk.
Second, the large mortgage companies, which purchase loans and set mortgage rates, maintain limited business processing capacity. Currently, there is more demand for loans and refinancings than these mortgage firms can handle. Therefore, mortgage companies face less incentive to pass along the lowest possible rates to customers.
Insights from the Mortgage Bankers Association
As analysts further ponder the coronavirus impact on mortgage rates, we examine actual figures from last week which illustrate these outcomes. For the week ending February 28th, 10-year and 30-year Treasury yields fell 25 to 30 basis points. By contrast, the Mortgage Bankers Association (MBA) reported that average jumbo loan rates were unchanged during that period. These average 30-year conforming loan rates only fell by about 15 basis points.
Additionally, investors question why Tuesday’s 50 basis point rate cut by the Federal Reserve didn’t cause a similar decline in mortgage rates. This answer is much simpler. The Fed sets only short-term rates. Also, all of those did drop by roughly 50 basis points. However, a wide range of factors set long-term rates such as mortgage rates. Conclusively, mortgage rates aren’t tied to movements in short-term rates.
Looking Ahead to Further Coronavirus Impact on Mortgage Rates
Looking ahead, investors wait to see the further impact of the coronavirus on mortgage rates. While the virus started a few months prior overseas, it’s relatively new to the United States. Thus, we’re in somewhat of a holding pattern. However, analysts anticipate that mortgage rates continue to plummet.
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