The yield spread between agency MBS bonds and 10-year U.S. Treasuries on Wednesday reached a level not seen since 1986, according to a report by Bloomberg's Jody Shenn. The spread is boosting the cost of conforming mortgages for high-quality mortgage borrowers at time when mortgage affordability is a chief concern for many market participants. The spread on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed rate mortgage bonds and 10-year government notes widened to 204 basis points on Wednesday, 70 basis points higher than January 15, Shenn reported. The yield spread is part of what determines prime, conforming mortgage rates. From Bloomberg:
The spread for Fannie Mae's current-coupon securities over the average of yields on 5-year and 10-year Treasuries, a benchmark closer to their expected lives, was already the widest since 1986, according to Bloomberg data. That spread today rose to 258 basis points from 170 basis points on Jan. 15, the recent low. The similar spread for bonds backed by the U.S. government are also at the highest since the 1980s, at 225 basis points.
Option-adjusted spreads followed the same pattern, reaching the highest level in at least 11 years according to data from Merrill Lynch & Co.