The 10-Year Treasury Note Now Separated From The 30-Year Fixed Rate Mortgage

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With the global economy in tatters, yields on the 10-year U.S. Treasury note are dropping. However, mortgage rates are not. The divergence between the 10-year treasury and mortgage rates debunks one of the most commonly-cited pieces of "common knowledge" in the mortgage business.

People say you can tell in which direction mortgage rates are headed by watching the 10-year treasury. The chart at top proves that false. Mortgage rates and the 10-year treasury are disassociated over the near-term.

Click here to see today's mortgage rates.

Where Mortgage Rates "Come From"

For every type of U.S. mortgage, there's a different basis for assigning a mortgage rate. For example, mortgage rates for portfolio loans (e.g.; jumbo mortgage, super jumbo mortgage, non-warrantable condo) are often based on some cost of funds-type index such as COFI, plus a spread. HELOCs are based on Prime Rate.

Other mortgage rates, though, are based mortgage bond prices within a particular market.

Conforming mortgage rates are based on the price of Fannie Mae and Freddie Mac mortgage-backed securities, as one example. By contrast, FHA mortgage rates are based on the price of a Ginnie Mae mortgage-backed security. This is why conforming mortgage rates can fall on a day that FHA mortgage rates are up -- the products' respective rates come from separate, distinct markets.

Note that no mortgage rates, however, are based on the 10-year treasury. If you want to know where mortgage rates are headed, therefore, you have to watch the mortgage-backed bond market. That's fact and it's provable.

Click here to see today's mortgage rates.

10-Year Treasuries Are A False Indicator

In defense of the 10-year treasury, it's got a terrific, long-term correlation to mortgage bonds.  And perhaps that's why "expert" like to link the two.

The issue, though, is that everyday homeowners in places like Orange County, California; Bergen County, New Jersey; or Montgomery County, Maryland don't shop for mortgage rates over the 5-year correlation window cited by the expert.

Rate shoppers compare mortgages rates over the course of one day.

There's very little correlation between the 10-year treasury and mortgage bonds when we consider the actual timeline on which a rate shopper is active. On same days, 10-year treasuries will move in the same direction as Fannie Mae, Freddie Mac or Ginnie Mae bonds. On other days, 10-year treasuries will move in the opposite direction.

In 2011, there was only one calendar day on which the 10-year treasury note and the current Fannie Mae coupon made the exact same move in the exact same direction.

Nearly every day, the 10-year treasury moves differently from the drivers of conforming and FHA mortgage rates, proving that you can't use the 10-year treasury as a mortgage rate proxy. It fails terribly.

Click here to see today's mortgage rates.

To Track Mortgage Rates, Ask For One

With turmoil in Europe, demand for U.S.-backed government debt has been high. This includes issuances from the U.S. Treasury, and from Fannie Mae and Freddie Mac. The demand has helped to drive down yields for all government-backed products.

However, the 10-year treasury is down more than its mortgage-backed counterpart. Since last year, the spread between the 10-year treasury note and mortgage rates has widened by nearly 50 basis points.

The best way to track "real" mortgage rates is to get a live quote from a lender.

Click here to see today's mortgage rates.