Source: Fout and Duncan (2020).
The “Primary Spread” is the 30 year fixed rate mortgage rate and 10 year Treasury. The “Secondary Spread” is the difference between the return on mortgage backed securities and 10 year Treasury. The “Secondary-Primary Spread” is the difference between the 30 year fixed rate mortgage and the mortgage backed securities return.
From the summary:
• Mortgage spreads, especially the primary–secondary spread (mortgage rate versus current coupon yield on MBS), remain historically wide following the COVID outbreak in the US.
• Increases in liquidity in the mortgage-backed securities (MBS) market coinciding with the Federal Reserve’s increased MBS purchases have historically been correlated with declines in the secondary spread (current coupon yield on MBS versus Treasuries), con-sistent with the post-COVID surge in Fed MBS purchases and subsequent decline in the secondary spread.
• Increases in the primary–secondary spread have historically been correlated with increased capacity constraints faced by lenders, for instance, measured by increases in production per mortgage-related employee. The persistent widened primary–secondary spread in the aftermath of COVID-19 is consistent with this historical pattern.