Comments on: Mortgage Rates Not Related to the Federal Funds Rate

By: test

test — Sun, 28 Jun 2009 20:25:56 +0000

i’m not an expert but that graph shows that there is some relationship, it certainly does NOT show that they are not related.
if banks can borrow money cheaper then they will lend it cheaper.. no? thoughts from experts?

By: Shailesh Ghimire

Shailesh Ghimire — Thu, 18 Dec 2008 05:13:53 +0000

Your point is very well taken. I would add though I have seen enough data to not even use the 10Y treasury as a benchmark. The best of course are Mortgage Backed Securities.

Thanks for your feedback.

By: pedant

pedant — Tue, 16 Dec 2008 06:59:33 +0000

It would be incorrect to state that there is a *direct* relationship between fixed mortgage rates and the Fed Funds rate, but there definitely is significant correlation between the two. Lots of things usually happen when the Fed cuts rates; I say usually, since things are working a bit differently now given that the market seems psychologically bounded. Ok, Fed cuts rates, the costs of lending goes down for banks on a short-term basis. So, of course, the rate on a 30-year mortgage isn’t going to drop lock-step with a near quarterly-adjusted OVERNIGHT rate, but the correlation IS there because of its impact on the capital markets as a whole and, in more recent years, due to utter disregard for responsible risk management.

A better benchmark would be the yield on a 10Y treasury bill. The yield for these tend to correlate very strongly with the 30Y mortgage rate since 10 years is how long it takes, on average, for these mortgages to be paid off. Again, these are all things that happen under normal circumstances. The markets have gone haywire. Mortgages, including mortgage-backed securities were generally considered very safe fixed-income investments. That’s gone out the window and the spreads between mortgage rates and 10Y notes have hit historical highs.

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By: Jay Thompson

Jay Thompson — Wed, 26 Sep 2007 05:36:30 +0000

Excellent analysis Shailesh! I swiped the chart and posted it (with appropriate linkage), but let me know if you want me to pull it.

By: John Power

John Power — Wed, 26 Sep 2007 03:10:31 +0000

I totally agree with your view. This a great article, clearing up the confusion.

By: Valorie Bradley

Valorie Bradley — Tue, 25 Sep 2007 23:01:01 +0000

Great blog entry! I think too many assumed that mortgage rates were going to drop as a result of the rate cut. The cut just motivates the economy to spend!