Rates are heading lower.  It’s true, the 10-year treasury yield, which is traditionally closely correlated with mortgage rates, is down nearly 30% over the past 6 months.  If you’ve been anywhere near a newspaper, TV or Twitter feed in the last couple weeks you have heard about the collapse of interest rates.

Safety in US Bonds

As a global slowdown comes into view, investors across the globe are reaching for safety and that means they are buying US Treasury BONDS. Across the Atlantic, European bond yields are deep in negative territory, making US treasuries even more attractive to investors who want positive cash flow. As demand for government bonds soars, one would assume that this rising tide would lift all bond boats, including mortgages. Unfortunately, this has not completely been the case recently.

Growing distance between treasury and mortgage rates

Traditionally, mortgage and treasury rates move together. However, when interest rates fall, like they have in 2019, investor holdings of mortgages and mortgage-backed securities (MBS) tend to evaporate into thin air as consumers race to refinance their home loans. This puts considerable strain on portfolio managers who own mortgages and mortgage bonds and see their values plummet.