Ad hoc time series analysis.
The 30 year mortgage rate and 10 year Treasury constant maturity yield comove over the past 8 years. A Johansen maximum likelihood test (constant in cointegrating equation, in VAR, 4 lags of differences) rejects the no cointegration null using the Trace statistic (also only 1 cointegrating vector, so both series might be stationary) over the 1986-2024M08 period.
The null hypothesis of (1 -1) cointegrating vector is not rejected (point estimates (1 -1.02).
Using a single equation error correction model (imposing homogeneity) yields:
These estimates indicate mortgage rates are about 7 ppts above 10 year Treasurys. A one percentage point reduction in the 10 year yield results in a 0.75 percentage point reduction in mortgage rates upon impact (here, in month). Deviations from equilibrium have a half live of about 4.5 years.
The relationship is subject to structural breaks, as indicated by recursive one-step ahead Chow tests, particularly around September 2022.
Figure 1: Probability for recursive Chow one-step ahead test for no break (left scale), recursive residuals (right scale). NBER defined peak-to-trough recession dates shaded gray.
If 100 bps reduction in the Fed funds rate (currently the talk for end-of-year) results in about 30 bps reduction in the ten year, this implies about 23 bps reduction in mortgage rates by year’s end (ballpark!).
Off topic but timely since Trump is touting the benefits of his proposed tariff system. After all Trump says tariffs lower the price of imported food.
It seems someone at the Heritage Foundation in 2019 had a very different view!
Do No Harm: Tariffs and Quotas Hurt the Homeland
https://www.heritage.org/trade/report/do-no-harm-tariffs-and-quotas-hurt-the-homeland
Trade policy has been at the forefront of the Trump Administration’s agenda primarily to help the domestic manufacturing sector. To achieve its goals, the Administration has used its authority to impose new trade barriers—namely tariffs—on a wide variety of goods imported from multiple trading partners. Although the Administration believes tariffs are a good negotiating tactic, implementing these barriers is dangerous because tariffs detract from the value U.S. businesses create, thus creating a risk of harming the domestic economy. Many businesses have requested tariff relief, and some are pressuring the Administration to consider replacing tariffs with quotas, which are potentially more harmful than tariffs. Unlike tariffs and quotas, free trade allows Americans to access more goods of differing qualities at different prices.
Well it seems the MAGA morons following little JD are dumber than he is:
https://x.com/Acyn/status/1836490587006210471?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1836490587006210471%7Ctwgr%5Ee3cfe199c6c74e0a8d8f8e37011d4ce426950108%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.thedailybeast.com%2Fmaga-fans-at-jd-vance-rally-boo-rate-cut-that-will-alleviate-inflation
They all boo’d the interest rate cut while JD gave a really dumb reply to the reporter’s question. Does this clown even know what the FED did today?
No. Or Vance would have done better with his “harvest:” app thing-ie, He’s pretty much as dumb as our man Kopits, who thought he could win a municipal election because everyone else was absentee.
Two things –
We have to assume mortgage rates already price in some of today’s rate cut.
The likelihood that recent mortgages will refinance as rates fall shortens duration of MBS. Mortgages during the period of high rates are very likely hedged against, and priced off of, Treasuries of shorter duration than ten year notes.
This is one of those posts where I wonder if Prof Chinn is asking a semi-rhetorical question. He is pretty sharp and must have some students working at investment banks etc,. He’s careful not to say where markets are going (a difficult undertaking) And yet……
https://x.com/Acyn/status/1836490587006210471?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1836490587006210471%7Ctwgr%5Ee3cfe199c6c74e0a8d8f8e37011d4ce426950108%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.thedailybeast.com%2Fmaga-fans-at-jd-vance-rally-boo-rate-cut-that-will-alleviate-inflation
Time for Trump to sell some stock?
Those who have followed the turkey known as Trump Media probably know all of what Kevin Drum offers here but the way Kevin mocks those who hold this turkey is classic!
Keeping with the idea that long, fixed-rate mortgages (15 and 30-year mortgages) have priced off of Treasuries of shorter duration than 10-year notes during the period of high rates, here’s a picture of yields on 2s, 5s and 10s so far this year:
https://fred.stlouisfed.org/graph/?g=1tTX0
Lots of action in 2s and 5s. If it is the case that MBS hedging has been against Treasuries with maturities shorter than 10s, maybe yield-curve dis-inversion (de-inversion?) means a good bit of the decline in mortgage rates has already taken place? Maybe, but it doesn’t look like based on the 30-year mortgage/10-year Treasury spread:
https://fred.stlouisfed.org/graph/?g=1tU2c
The 30/10 spread is still about 1% wider now than prior to the Covid mess. So maybe take whatever is going to happen to 10-year note yields and subtract 1% more for 30-year mortgages.
This is a bit wishful, I suppose, compared to Menzie’s estimate. Staring at mortgage spreads, I just say “here’s an extra 100 basis point decline in mortgage rates” when spreads may not return to their pre-Covid state.
Off topic – the VA has stopped using cats and dogs in medical research:
https://thehill.com/opinion/congress-blog/4885346-va-ends-animal-research/
Something about a shortage in Ohio…I guess…
Funny, hahahaha. I’m driniing now and kinda in that dark spot. I needed that laugh so much, thanks pal
When does the media start touting that Bidenomics worked and produced an economic recovery and lasting economic growth from the worst Trump healthcare response to a pandemic in modern history and 10% unemployment from the Trump/GOP recession? And it was done in the face of the highest interest rates in decades. Now that grocery prices are down – can we talk to some people that put savings in CDs paying unprecedented 5% interest? I recall my parents talking about getting a 5% CD back in the late 70s? (I don’t know – I was little kid and remember it had something to do with my hero – Jimmy Carter.)
Also can JD Vance take a look at reality – “Overdose deaths in Ohio are down 31 percent” rather than make up xenophobic/racist smears targeting some people – https://www.npr.org/2024/09/18/nx-s1-5107417/overdose-fatal-fentanyl-death-opioid
Also for today – the do-nothing/obstruction House GOP – their only achievement was spending millions of tax payer $ to have staffers do a B.S. three-year investigation of a private citizen’s Russian hacked laptop to find dirt on Biden (nothing there GOP – hey Comer – Putin trolled you) – is once again – doing Trump’s bidding and threatening to shut down the U.S. government – even Senator Leghorn/Foghorn/GOP party gravedigger says – now boys – ya’ll know that’s politically beyond stupid – https://digbysblog.net/2024/09/18/trumps-campaign-message-burn-the-place-down/