Mortgage rates are plunging with the financial markets, but why aren’t they even lower?

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Amid a wave of selling in the stock market driven by coronavirus concerns, the 10-year Treasury note, a key bellwether for mortgage rates, plunged to a record low of 1.31 percent on Tuesday, breaking a low set in July 2016.

The Dow Jones Industrial Average plummeted 900 points on Tuesday, the second consecutive day of major declines that brought the two-day drop for the index to nearly 1,900 points.

“The fear gripping markets is driving bond yields sharply lower, with mortgage rates dropping though not in lockstep,” says Greg McBride, CFA, Bankrate chief financial analyst. “Homebuyers and those looking to refinance will find this an opportune time to lock in a rate at one of the lowest levels we’ve ever seen.”

Mortgage rates have been steadily falling, with a few intermittent jumps, since the first case of the coronavirus was reported on December 31, when the 30-year fixed-rate mortgage dropped from 3.9 to 3.86 percent. Currently, rates are hovering around 3.75 percent but appear to be headed still lower with the drop in the Treasury rate.

Rates are not as low as the 10-year Treasury would indicate

Although mortgage rates are trending downward, nearing all-time lows, they’re not keeping pace with the steep declines of the 10-year Treasury yield. Given the 10-year Treasury, mortgage rates should be around 3.2 or 3.1 percent, says Lawrence Yun, chief economist for the National Association of Realtors, instead of their current 3.75 percent levels.

“There are a few possible reasons rates aren’t lower,” Yun says. “Lenders might think this is a good profit opportunity, assuming borrowers don’t care about a few basis points. Another reason would be for lenders to close the gates on customers as more people want to refinance and they don’t have the resources to manage an influx of new loans. And the third possible reason is the future of Fannie and Freddie’s government guarantee.”

Some experts speculate the large spread between 10-year Treasury and mortgage rates has to do with lenders fearing a coronavirus-fueled slowdown of the world economy.

“If COVID-19 is a prelude to world recession it could impact U.S. GDP and jobs, making mortgage-backed securities riskier (more lates and defaults) than at present,” says Dick Lepre, senior loan adviser, RPM Mortgage, Alamo, Calif.

For homebuyers and refinancers, lock or to wait?

Rate watchers want to know if this is the time to jump on low mortgage rates or if they should wait a little longer in hopes of getting even deeper discounts on loans.

Bankrate polls experts each week on the direction of mortgage rates.

For borrowers with adjustable-rate mortgages, there’s the question of how long to ride the wave of low rates and knowing when to lock.

“The stock market was already exuberant, with extremely high valuations, and the coronavirus was the excuse it needed to step back — but it was already inevitable,” Yun says. “If that’s the case then this is the low point for the Treasury — but on the other hand there are consequences if the virus spreads.”

There is the possibility that the spread between the Treasury yields and mortgage rates will tighten, which will help drive rates lower. However, there’s no guarantee that rates will drop, which could make waiting a risky bet.

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Written by
Natalie Campisi
Mortgage reporter
Natalie Campisi is a former mortgage reporter at Bankrate.
Edited by
Senior mortgage editor
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