The “Battle of the Bulge”

10 year US Treasuries were up 14 bps this past week vs 26 bps for Mortgages.  Thus the spread increased by 12 bps to 60 bps ABOVE the long term spread of 168 bps between the two.
5 year US Treasuries have been increasing faster than 10 year and 5 years are 3 bps above 10 year.  To resolve this slight inversion, the 10 years will likely increase faster in the future—thereby putting additional pressure on mortgage rates.
Below are two additional schedules.  One shows how the spread between the 10 year US Treasury and mortgage rates have fluctuated over time, it has not been a fixed 168 bps difference.  This will not be a recurring item in this weekly publication.

The NEW item has Yield Curves from prior time periods on one graphic.  While the first graph does have the rates by term, it did not have a graphic for the yield curve.  The fact that 5 year rates exceeded 10 year rates did not jump off the chart, hence I thought it would be best to have a visual. Given the shorter term is higher than the longer term, we will wind up with a “battle of the bulge”.   Either longer rates will go up faster than shorter–or—short term will drop faster.  Given we are in an increasing rate environment, smart money is on the longer rising faster.

Spread Fluctuation

For the 7 day period ending 3.24.22, 10 Year Treasury rates increased 14 bps. In the prior week it was up 22 bps This past week, mortgage rates increased 26 bps.. This caused the net spread between the two to increase 12 bps to 60 bps ABOVE normal spread of 168 bps. Bond investors are trying to get ahead of the Fed’s future moves. Rates ROCKET up and feather down.

Cumulative Changes – 60 BPS

Daily changes in the US 10 Year Treasury rates are the blue bars while the red line is the cumulative change in rates since 3/4/22. Cumulative changes over the past 14 trading period resulted in a 60 bps increase. For the blue bars it is unusual to have changes of greater than 0.10 in a single day and 0.20 is VERY usual.

Spread: 30 Year Mortgage Rates and 10 Year T-Bill

The historical average spread between the 30 year mortgage rates and 10 year US Treasuries is 168 bps. There is NOT a direct cause & effect linkage but rather a correlation. Right now mortgage rates are rising faster than the 10 Year in anticipation of future rate increases by the Fed.
The green line is the 168 bps historical spread while the pink is current spread. Note how the red line is well above the 168 historical by 60 +168 = 228. While this is higher, there have been many times where the spread has been even larger (usually in periods of rapidly declining 10 year Treasury rates..
Yield Curve: since the beginning of the year, longer term rates have been rising faster than very short term rates in antioption that the Fed was going to increase rates. 5 Year Treasury rates are now actually 3 bps HIGHER than 10 year. To correct for this very slight inversion, 10 year rates will need to rise FASTER than 5 year rates.

Bill Knudson, Research Analyst Landco ARESC