The bond market sell-off continues pushing the 10-year Treasury bond yield, for the first-time since 2014, over 2.70% currently trading at 2.701% after hitting a yield earlier today of 2.72%!
Some of you will be asking why you should care about the treasury bond market, but others involved with real estate or mortgages in any capacity should and will be taking a keen interest. Additionally, anyone with consumer debt that’s tied to interest rates should also be taking notice.
Chart Courtesy of MarketWatch
While the treasury yield curve remains basically flat beyond 7-years, any prior fears of an inverted treasury yield curve (10-year yields below 2-year yields) have given way to the thought that the yield curve will in fact begin to steepen.
This means that the basis point spread between short treasury market maturities and long will grow wider. For example the current spread between the 2-year treasury (2.14%) and 7-year treasury (2.64%) is 50 basis points while that of the 2-year and 10-year (2.70%) is 56 basis points. Flat, flat, flat!
If the spread between the 2-year and 10-year treasury were ever to ‘normalize’ to between 150 and 250 basis points, it would bode poorly for mortgage rates and the housing market.
As an example if the Fed were to raise rates 4 times in 2018 as many have predicted, the 2-year treasury would rise to 3.0% or so. Were the spread between the two and ten-year treasury to ‘normalize’ to 200 basis points, then the 10-year treasury yield, on which mortgages rates are based, would be in the 5.0% or so range!
With 30-year fixed-rate mortgages currently above 4.0%, the scenario above would result in mortgage rates rising to well above 6.0%.
While still somewhat reasonable by historical standards, home affordability, particularly for first-time homebuyers, will be negatively affected (not to mention the federal deficit as the cost to service the nations $20 trillion+ in debt would soar).
