The New Normal for Mortgage Rates Will Be Higher Than Many Hope

livemint.com:

Interest rates are likely to come down later this year, with the Federal Reserve on track to start cutting rates. But mortgage rates might not follow as quickly. That is because mortgages, and mortgage-backed bonds, just aren’t as in demand in financial markets as they were in the years before the Fed began to start to tighten in 2022.

And they might not be for a while. The extra yield over Treasurys—or spread—demanded by investors to own mortgage-backed securities issued by government-sponsored enterprises such as Fannie Mae or Freddie Mac, known as agency MBS, has come down a bit from the highs touched last year. But it still hasn’t narrowed back to historical levels.

Wider spreads appear to be a new normal for the mortgage market. That in turn means homebuyers for now can expect to keep paying relatively higher rates. The yield gap between mortgage bonds and Treasurys is still around 1.5 percentage points, according to figures compiled by Bank of America.

The typical spread a few years ago was around 1 percentage point. “There is further room for tightening spreads," says David Finkelstein, chief executive and chief investment officer of Annaly Capital Management, a real-estate investment trust that invests in mortgage bonds and other strategies across residential mortgage finance. “But we don’t believe we’re going back to pre-2022 levels." One crucial driver of a new baseline is that the Fed seems increasingly unlikely to return to the market as a buyer of agency MBS.