The news flow about the 10y Treasury has been getting a lot of attention, especially after the jobs report on Friday where the markets saw a sell-off. But what hasn’t been getting talked about as much is the increase in 30yr mortgage rates. Here’s a chart from the St. Louis Fed that shows the two rates together:
I posted this document on Scribd that shows some dawdling I did with the data:
- Correlation of 0.82 is quite high, so when one rate goes up the other tends to go with it. Same applies in the other direction.
- I ran a regression to look at the relationship between weekly changes in 10yr Treasuries and 30yr mortgages. Basically, if 10yr Treasuries went up 10bps then 30yr mortgages went up 14.5bps (the reciprocal of the 0.69 coefficient in the regression). The R-squared of 0.49 tells me goodness of fit isn’t all that great, but without doing a lot of investigation into lags, etc. this isn’t the worst performing regression either.
Some more thoughts:
We all know this chart:
But now let’s break this down based on the Fed’s H8 data. This chart is the same as the previous one, but it isolates the last two years:
But if you break this down, you’ll see two components that number breaks down into: Agency MBS purchases and non-MBS purchases.
The data doesn’t go back far enough to get a clear read on just how long banks have been holding MBS in these amounts but it tells me their holdings have been propped up in value by the Fed’s purchases.
Which has me wondering why we’re seeing rates go up. I don’t know how much of the recent rate increases we’ve seen is due to bank sales, but if you’re a bank that needed to improve liquidity, which would you rather sell? Mortgages or Treasuries?