The Triple Punch of Monetary Tightening on U.S. Mortgage Rates.
By Viral Acharya and Satish Mansukhani
Since the onset of the Federal Reserve’s (the Fed’s) monetary tightening in 2022, the 30-year fixed mortgage rate in the United States (US) has gapped out to 7 percent. Around 300 basis points (bps) at present above the 10-year US Treasury yield (see Figure 1), this spread has historically been stable at around 200 bps; this was the case even during the pre-pandemic interest-rate hikes (2016-19) and quantitative tightening (QT, 2017-20) episodes.
Why is this time different? We explain below that the current break from this trend is caused critically by the interplay of the Fed’s and domestic banks’ balance sheets. Changes in the risk appetites of institutional investors (bank and non-bank) and the profitability considerations of mortgage lenders have combined with this interplay to produce an unprecedentedly fast and amplified passthrough of monetary tightening to mortgage rates.
In addition to the 10-year Treasury yield, the 30-year primary mortgage rate serves as a commonly cited benchmark for the US economy and financial markets. Two contributors drive the spread between this mortgage rate and the Treasury yield.
Read the full International Banker article.
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Viral Acharya is the C.V. Starr Professor of Economics