Rate Relief Ahead?

Mike Zaccardi

ONE OF MY FAVORITE indicators right now is the ICE BofAML MOVE Index. Sound like trading jargon? Think of it as comparable to the VIX, except—instead of measuring stock market volatility—it does the same for bonds. Today, it’s indicating improving confidence in what’s lately been a very turbulent bond market.

MOVE is high when there are big daily swings in bond market interest rates. That’s what we’ve seen in 2022 as traders grapple with fast-changing economic data. That volatility has also rattled homebuyers. Thirty-year mortgage rates, which typically aren’t subject to big swings, have ranged between under 5% and almost 6% within a matter of weeks. To see how wild the mortgage market has become, I keep tabs on the daily change in mortgage rates.

The mortgage rate market has settled in the 5% to 5.5% range for now, while the 10-year Treasury note closed near 2.85% on Friday. That means mortgage rates are about two-and-a-half percentage points higher than the 10-year yield. Historically, that spread has averaged around 1.85 percentage points. What explains the larger-than-normal gap? A big reason is the volatility in interest rates.

History tells us that when the Treasury market gets wild, lenders are less willing to offer favorable loan rates. For instance, during the 2008-09 Great Financial Crisis, the spread blew out to more than three percentage points, and it was nearly that high at times earlier this year.

But things should improve if inflation continues to moderate. The MOVE index has dropped by almost a third over the past few weeks. That waning volatility should lead to a narrowing of the spread between mortgage rates and 10-year Treasury yields, potentially making buying a home less costly for borrowers. Let’s face it: Buyers need all the help they can get right now. Last week, the National Association of Realtors reported that housing affordability in June was the worst it’s been since 1989.

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