Invisible Hand

What Will the Fed Do Now That Rates Are at Zero?

With the 30 year mortgage rate coming down this does show that banks and investors are willing to take some risk. The spread between the 10 year treasury and the 30 year mortgage is still rather high; today it's close to 3%; before the fall season it was at 2.5%; and historically during normal times it's between 1 to 2%.

Eventually we will return to a spread of 2.5%. For this to happen one scenario is that the 10 year bonds would sell off causing its yield to increase, and if mortgage rates would stay constant. The polar opposite would be bond yields staying constant and mortgage rates falling.

If the stock market improves due to the inauguration effect, we should see the first scenario in the short run; bonds sell off when stocks go higher. Inflation worries are another event that could trigger a sell of bonds. I'm not sure how much more mortgage interest rates can fall from here. Fannie and Freddie are supposed to sell MBS in the next week and this should be a tell for mortgage rates.