Why The Yield Curve Is Suddenly The Center Of Attention

We can’t forget that all commercial interest rates – e.g., the rate quoted on a mortgage – flow from the federal funds rate on a cost-plus basis. The Federal Reserve is keen to raise the fed funds rate at least…

Media commentary on the yield curve has spiked in recent weeks. So, why all the chatter and why does it matter?

The yield curve comprises a plot of U.S. Treasury security yields, with maturities ranging from one month to 30 years (11 plots in total). The yield curve is considered “normal” when the plot of each successive maturity is higher than the previous maturity to produce an upward sloping curve.

The yield curve is normal as we write. The issue is that it has continually flattened this year. The spread between short-term yields and long-term yields has shrunk. Markets pay particular attention to the spread between the yields on the two-year and 10-year Treasury notes.

The spread between the two securities was 90 basis points a year ago. Today, the spread is roughly 40 basis points. (The two-year note yields approximately 2.4%; the 10-year note yields approximately 2.8%.)

The yield curve has flattened precipitously this year. The concern is that the curve could continue to flatten and then invert – short-term yields would rise above long-term yields.

The concern is legitimate because every time the yield curve has inverted since 1956 a recession has followed (usually within a year). The yield curve was last inverted in June 2007. We all know what followed shortly thereafter – the Great Recession and the bursting of the housing bubble ensued.

The yield curve is still far from inverting, but its shape is worthwhile to monitor. After all, recessions are a big deal.

As for the height of the yield curve, Treasury yields have risen across the board since January. This includes the influential 10-year Treasury note, which has risen 35 basis points this year. The 10-year note has taken a breather. The yield has hovered around 2.8% for the past three weeks.

As the yield on the 10-year note goes, so go mortgage-rate quotes. Quotes on the prime 30-year fixed-rate loan continue to hold the 4.5%-to-4.625% range on the national scene. Quotes also continue to hold closer to 4.5%, as they have for most of April.

Recent U.S. hostilities with China and Russia (in Syria) have put financial-market participants on edge. Treasury securities provide a haven for edgy participants.

Therefore, mortgage borrowers with a low-time frame and a high-risk threshold might consider floating their loan.

“High-risk threshold” is the operative term. The risk could easily outweigh the potential benefits.

We can’t forget that all commercial interest rates – e.g., the rate quoted on a mortgage – flow from the federal funds rate on a cost-plus basis. The Federal Reserve is keen to raise the fed funds rate at least a couple more times this year (after raising the rate in March).

Odds are that mortgage rates will rise longer term. Predicting with accuracy when the short term will give way to the “longer term” is never a sure bet.

The Shortage: Nationally and Locally

We frequently present national numbers when presenting data. Homes for sale on the national level are in short supply. This is reflected in the monthly data offered by Realtor.com and other sources on home sales and supply. Neither has been able to gain traction.

When the national numbers are distilled to local markets, they frequently change. The national number frequently has no direct bearing to a particular local market.