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This morning, the 5-year bond yield fell to 2%—a key psychological level.

It was also the lowest 5-year yield since last November, and 90 basis points below the recent peak on April 8. (Bond yields lead fixed mortgage rates.)

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Deeply discounted fixed rates are now 156 basis points above the 5-year bond. Roughly 125 bps is more typical for aggressive lenders.

What’s more, the 5-year “posted – bond yield” spread is now the widest its been since October.* At 336 bps, it’s also well above the 10-year average of 282 bps.

This all portends lower fixed rates in the near term.

So far, most lenders have been content to merely trim rates behind the scenes. Banks have refrained from moving their advertised pricing (partly to keep spreads wide as long as they can).

That can’t last forever. Banks will likely have to adjust advertised mortgage rates soon, barring a sharp rebound in yields this week.


*  The posted – bond yield spread is the difference between posted 5-year fixed mortgage rates and 5-year government bond yields. The 5-year yield is a rough approximation for the “base cost of funding” for 5-year fixed mortgages. On top of that, lenders incur a host of other costs related to underwriting, overhead, marketing, compensation, administration, securitization, hedging, etc.


Rob McLister, CMT

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