Market Spreads – Moving in the Desired Direction but More is Necessary in the Mortgage Market
Spreads in the financial market continue to narrow across the spectrum, for the most part. The 3-month Libor-3-month T-bill spread was 96 bps on February 6, continuing to signal improving conditions (see chart 1).
The cost of borrowing for firms, as reflected in the Moody’s Baa less 10-year Treasury note yield, is down nearly 100 bps points (see chart 2) from its high in late-2008.
A similar narrowing of market spread is visible in the junk bond sector, with the spread between junk bonds and the 10-year Treasury note now at roughly 1512 bps, down from a peak of 2005 bps in October 2008.
However, the 30-year fixed rate mortgage has advanced from a low of 4.96% during the week ended January 16 to 5.25% during the week ended February 6 (see chart 4). The recent low for the 10-year Treasury note yield was 2.24%, with today’s quote at 3.0%. If the yield on the 10-year Treasury note advances further, the Fed may initiate a plan to target the 10-year Treasury note yield.
