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How much lower can mortgage rates go

how much lower can mortgage rates go

When in doubt, ask FRED (Federal Reserve Economic Data)

Long Term Government Bond (

Three month T-Bill (

10-year Government Bond (

20-year Government Bond (

So yes, if you're willing to believe that mortgages will always trade at some kind of reasonable spread off Treasuries, rates can go lower.

You should also note that the shape of the yield curve is variable: the fact that the Fed Rate is X does not imply that the 30-year rate will be Y. Thus, for example, when the Fed Rate was kept very low in 1993 to help bail out the S&L's, the yield curve was abnormally steep, because everyone knew it wouldn't last. So a lot of institutions (most famously Orange County) extended term to get some of that ever-so-risk-free extra yield and came to grief in 1994.

Similarly, Britain's yield curve in the '90's moved from very steep to flat, with the short term rate rising and long term rate falling. This was a textbook example of the different influences at work: the short end trades on monetary policy, the long end trades on expectations of inflation (mainly); so raising short rates may lower long rates if the market takes the view that this toughness will kill inflation.

Incidentally, one of my cherished scraps of trivia is that T-Bill rates went negative from time to time in

the Great Depression, i.e. people were willing to pay more that $100 for a government $100 IOU, the rationale being that money kept in cash at home would get stolen, money invested in business would be lost and money deposited in the bank would be at risk of the bank going under, so what else is left?

However, on the Fed site, I can only see three month secondary market T-Bill yields going down to 0.15% or so - but these are weekly averages - if anyone can confirm the above story, please let me know.


10-03-2002, 10:09 PM

People keep mentioning the Fed & the rates that they set, but those have nothing to do with mortgage rates (except in the most indirect way*).

If the stock market starts to recover in a meaningful way and confidence in the market is restored, money will move back out of bonds and into stocks. That is when bond prices will fall (and rates will rise) and mortgage rates will follow. If the stock market continues to wallow in self-pity, mortgage rates will hold steady or fall.

* When the Fed tinkers with the Federal funds rates, it affects the stock market, which affects the bond market, which affects mortgages- three degrees of separation instead of any more direct relationship implied by "the Fed lowered (or raised interest rates"

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