Mortgage Rates Unlikely To Go Much Lower

As of last week, the difference between the 10 year Treasury yield and Freddie Mac’s average 30 year fixed-rate mortgage has widened to more than two percentage points. That compares with a low of about 1.3 percentage-points as recently as April.  In other words, were the spread still as tight today as it was this spring, the 30-year mortgage rate would now be averaging about 3.3%. Instead, it is still over 4%. The reason this spread has widened is largely because investors have started to balk. The lower yields go, the less inclined investors are to hold mortgage-backed securities. That puts upward pressure on rates. So too does the possibility of a major refinance program from the Obama administration. That could lead to hits for some holders of mortgage-backed securities, which may prompt some to sell in advance of any such program. This leaves the Fed and the White House inadvertently working at odds with one another. In light of this, it will be increasingly difficult for
the Fed to bring about lower mortgage rates, even if it manages to push long-term interest rates down further.

Wall Street Journal  September 21, 2011