30-year mortgage rates are generally higher than long-term Treasury yields because mortgages are riskier. Usually the spread is around 1.7%, but for the past year it's been close to 3%. However, the Wall Street Journal informs us that the spread is coming down, which indeed it is. But not by much:
The Journal promises to tell us the "hidden force" behind the decline in the spread, but tell me if this makes any sense:
These days, investors have lots of reasons to demand more yield. For one, there is the risk that mortgages extended today won’t be around tomorrow. If rates fall, as many expect, homeowners will refinance into lower-rate loans.... The central bank last month signaled it is likely finished raising rates and could cut rates this year as inflation has been falling and the economy has remained strong. That is reviving investor demand for mortgages somewhat and pushing down the spread.
We are told that (a) the spread is high because rates might fall in the future and homeowners will refinance, and (b) the Fed could cut rates and this is pushing down the spread. Huh?
I have no idea what's really going on, but I suspect this is little more than the usual Journal practice of desperately looking for trend pieces based on tiny amounts of data. Elsewhere today, they have an article about panic among investors because the stock market was down for the first two days of the year.
POSTSCRIPT: The New York Times has a reputation for publishing a lot of iffy trend pieces, but the Journal really wins the prize here. The Journal's trend pieces are typically less sexy because they're related to finance and economics, not avocado toast, but if anything they publish more of them and rely on even thinner evidence than the Times. Our nation's CEOs are apparently desperate to consume a constant stream of faddish business trends and don't care much if they're true as long as they tell them what they wanted to believe in the first place.¹
¹Examples: inflation is a threat, it's impossible to find good workers, millennials are slackers who think they're owed a job, Gen Z's weird habits are destroying some market or another, colleges have gone soft, it's getting harder and harder to make a profit, a bull market is right around the corner, etc. etc.
In the footnote of this posting Kevin gives a pretty good list of things CEO's like to be told regardless of whether they are true, but he inexplicably leaves off the most obvious and timely example nowadays: that workers are more productive in the office.
Scroll up. He addresses that one.
Yah, I saw that posting. Telework has clearly been on Kevin's mind, which is why it's interesting that he omitted it here.
Does it make sense? Yes it does. Is it true? Maybe. Maybe not. Countervailing factors are being evoked with more demand for yield, but demand increase drives pricing pressure down. However this summary by Drum shows he's not understood the paragraph (as quoted): "(a) the spread is high because rates might fall in the future and homeowners will refinance, and (b) the Fed could cut rates and this is pushing down the spread. Huh?"
While the WSJ journo may very well be telling a just so story, Drum is misunderstanding the story.
Extend the horizon of your chart then identify dates of Fed actions to increase/decrease central rate.
Worse than that. Every random wiggle in the stock market is lined up with whatever the big news of the day is as the cause. Every damn day.