I’m sorry that you didn’t win the Mega Millions jackpot. But at least you’re paying less in mortgage interest.

30-year mortgage rates hit a two-month low, from 7.08% down to 6.58%.

But their spread above the 10-Year Treasury bond yield is wayyy greater than usual. What’s going on?

No matter how much he coifs his hair, Jerome Powell’s Federal Funds Rate does not directly move long-term mortgage rates.

A phenomenon like what I’m about to describe does.

Imagine that you’re a bank with billions of dollars to lend.

You could make a loan to the U.S. government and earn interest on their bond yield, currently 3.72%.

This is a safe loan for you to make. In American history, the government has always repaid its debt.

Alternatively, as the bank, you could take more risk and lend it to a mortgage borrower.

To compensate for your greater risk, you must be paid a risk premium. That comes in the form of a higher interest rate. As stated above, mortgage rates are 6.58% today.

Historically, mortgage rates’ spread above the bond yield is about 1.7%. That’s your compensation for the greater risk.

As of November 29, 2022, it’s almost 3% (6.58 – 3.72).

This is because in times of heightened economic uncertainty, banks want more risk compensation from mortgage borrowers.

When the latest CPI number revealed that inflation cooled, the environment got a little more certain.

That’s why mortgage rates came down.

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