Investors pushing for fatter yields on mortgage-backed securities may undercut easing mortgage rates

abcnews.go.com:

Mortgage rates are expected to come down later this year, but any benefit to homebuyers could be muted by developments in the market for financial instruments tied to mortgages

LOS ANGELES — Mortgage rates are expected to come down later this year, but any benefit to homebuyers could be muted by developments in the market for financial instruments tied to mortgages.

Over the last couple of years, uncertainty about inflation and the trajectory of mortgage rates led investors to demand a fatter yield for owning mortgage-backed securities relative to what they would get buying the government’s 10-year Treasury bonds.

Mortgage-backed securities, or MBS, are investments made up of home loans and, like bonds, pay interest to investors. The difference in the interest, or yield, offered by each of these types of investments can be gauged by looking at the spread between mortgage rates and U.S. government bond yields.

Historically, that spread averaged around 1.7% a month. It surged last year, swelling in June to nearly 3% — the widest gap since August 1986, according to Federal Reserve data.

“When rates started rising, essentially we really didn’t know how high they would go or (for) how long,” said Mark Fleming, chief economist at First American Financial. “Mortgage-backed securities investors said ‘I need to charge you more over the risk-free 10-year Treasury rate to be willing to buy a mortgage-backed security.’”

The bond and mortgage markets are sensitive to what’s happening with inflation, Federal Reserve interest rate policy and other factors. Signs of cooler inflation and signals from the Fed that it might begin lowering its short-term rate this year have helped pull mortgage rates and bond yields lower after each hit