How High Will 30-Year Mortgage Rates Go in 2022? – Mish Talk
Chart Notes
- The mortgage rate is a monthly average of Freddie Mac data via the St. Louis Fed.
- Freddie Mac rates tend to be on the low side vs Mortgage News Daily averages.
- The average spread since 1972 is 1.71 percentage points.
May 3, 2022 Rates
- 30-Year Mortgage: 5.55%
- 10-Year Treasury Yield: 2.99%
- Spread: 2.56 Percentage Points
Mortgage Rate Convexity
The spread may seem a bit high but the chart shows spreads often rise in recession and when treasury yields rise. Some of this is due to Convexity Hedging.
The rise in Treasury yields creates the need for investors who hold mortgage-backed securities (MBS) to reduce the risks on the loans they manage and limit the negative effects of slower loan prepayments when interest rates climb, a move known as “convexity hedging”.
When interest rates rise, homeowners do not typically re-finance their mortgages and that limits the flow of prepayments. When prepayments fall, the duration is extended on an MBS because the holder is getting less principal every month.
Front-Running Quantitative Tightening
I also strongly suspect hedge funds are front-running expected Fed Quantitative Tightening (QT).
How nasty that might get is uncertain. But if the Fed does aggressive balance sheet reduction, including mortgages, we are likely to see a sustained jump in mortgage rates even if the yield on 10-year notes levels off.
How High?
6.0% or higher seems easily within reach.
Any 45 basis points combination from a treasury yield rise, convexity hedging, or balance sheet reduction would do it.
Another full point from here, to 6.5% is also within reach.
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If the Fed hikes to 3.25% as many expect (but I don’t) things could get even nastier.
Anything Else?
Yes.
Much depends on how fast the Fed can cause a recession, destroy demand, and crush the stock market and housing too.
S&P 500 Earnings Estimates for 2023 Rise, It Won’t Happen
If you think earnings and the stock market will rise with this going on, I’ve got news for you.
I repeat my April 22, 2022 message Expect More Stock Market Pain Because It’s Coming
Feelin’ Lucky?
This post originated at MishTalk.Com.
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