The onset of the global pandemic shocked the economy and triggered one of the deepest recessions ever in 2020. As investors fled to “safe haven” Treasuries and the Federal Reserve (Fed) lowered interest rates, the yield on the 10-year Treasury traded as low as 0.31% intraday on March 9, 2020 (its lowest closing yield was 0.51% on August 8).
Earlier this year, mortgage rates followed the 10-year Treasury yield lower to register an all-time low value of 3.3%. Fueled by additional purchases of mortgage-backed securities (MBS) by the Fed, mortgage spreads have narrowed while Treasury yields remain at depressed levels, only recently trading above 1%. As shown in the LPL Chart of the Day, the average rate on a 30-year fixed rate mortgage has continued to fall, now trading at just 2.88% according to Bankrate.
We’ve often referred to the economic recovery taking on a “K shape” where some segments of the economy are recovering and performing well (the upper leg of a K) and other areas are struggling (the lower leg of a K). The housing market has found itself in the upper leg of the recovery, as housing starts, building permits, existing home sales, and home prices have all surpassed their pre-pandemic highs.
“Perhaps it should come as no surprise that the housing market has boomed following a big decline in mortgage rates,” noted LPL Chief Market Strategist Ryan Detrick. “Low rates, undersupply, and the working-from-home environment have given us the best housing market in over a decade.”
Going forward, we continue to favor MBS relative to other investment-grade asset classes. MBS provide a more attractive yield than Treasuries, while also providing better insulation from rising interest rates compared to investment-grade corporate bonds.
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