Mortgage rate rise increases pressure for Fed intervention


By Robert Armstrong and Brendan Greeley
Financial Times, London
Saturday, March 14, 2020

U.S. mortgage rates have risen to the highest level in months despite recent Federal Reserve interest rate cuts, complicating the central bank's efforts to stimulate the U.S. economy as the spread of coronavirus curtails business activity.

The costs to consumers are increasing because of logjam in the $7.5 trillion market for mortgage-backed securities (MBS), where most U.S. home loans are bundled into securities guaranteed by Fannie Mae and Freddie Mac, the government-controlled "agencies," and sold at yields that tend to track those on the 10-year Treasury note.

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As the Fed has lowered rates in recent weeks, consumers have rushed to refinance mortgages, flooding the market with MBS. However, as the coronavirus has spread, banks and brokers that act as intermediaries in the market have struggled to sell the bonds. They also have little appetite for adding more of them to their balance sheets.

“Liquidity in mortgage-backed securities market, which is usually the second-most liquid market in the world after Treasuries, is on par with, if not worse than, what we saw during the financial crisis," said one bank credit strategist. "The market is telling the Fed: If you don't intervene, we are getting away from being a functional market."

As a result, the difference between yields on mortgage-backed securities and those on 10-year Treasuries has doubled since a month ago to 1.5 percentage points -- the widest spread since 2009, during the financial crisis, according to Bloomberg data.

American consumers are feeling the impact. The average rate for a 30-year fixed rate mortgage spiked to 4.12 percent on Friday, up from 3.55 percent at the beginning of the month and the highest since June 2019, according to

The development is frustrating for the Fed because it means reductions in its policy rate are no longer translating into lower mortgage rates. It also raises questions about whether a dramatic cut expected at its March 17-18 meeting will have the customary stimulative impact as Americans take advantage of lower mortgage rates to buy homes or generate savings by refinancing existing loans. ...

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