Jun 27, 2009
Mortgage Rates Relationship to the 10 Year Treasury Rate
I have known for quite some time that there is a strong relationship between daily mortgage rates and the 10 year treasury rate, but I could never find the actual equation. Thanks to Subprime Blogger and Calculated Risk for the following equation that shows the relationship between the 30 year fixed rate mortgage and the 10 year treasury rate:
y = 2.7283(x)^2 + .5881(x) +.0308
As stated on Subprime Blogger, this equation shows that mortgage rates should be around 5.477% and the last time I checked they were at 5.35%. Pretty close if you ask me as there is never a perfect correlation. Just to start the conversation, do you use the trend of the 10 year treasury rate to determine where mortgage rates are going? Do you even check mortgage rates on a consistent basis or just take the rate that is offered to you when you want to buy or refinance a house?
I didn’t know mortgage rates were tied to a particular treasury bill, but I’m not surprised. On the otherhand, “close, but not exact” estimation of the actual rates means it is just that, and estimation, not a formula. Could there be an equivalent formula based on 1-yr bills, or something else? If the banks themselves reveal the formula they use, then I would more readily accept using that equation. I would tend to believe, however, that there is some pencil-pusher in a bank’s back office who uses some formula, then fudges the result with some upward add-on to hedge his bet. Then, the other banks would probably look at that rate and try to match or compete with it. The equation is a good start, one that I will try to use to predict rates, because I’m a retired Math teacher and am still looking for “real life” uses for students to learn Math.
I have another need you may be able to help me figure out: How are APY’s computed starting with the APR on the face of a loan? Computing the return on a bank savings account is easy, but mortgages have fees and points attached to them that affect the true APY. The law forces lenders to reveal the true APY, but can you get me that itemizes the components of what they must include and an example for me to verify that the items included?
10 year T-Bill yield + 1.9%.
So if the T-Bill is at 3.5%, the interest rate should be around 5.4%.