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Could someone tell me the correlation between the 10 year Treasury Bond yield vs the interest rate?

Purchase Price : 323,000
Score: 733
downpayment 5%
Conventional 30 year.

someone told me its about 1.7 + 10 year bond = interest rate
  • April 26 2013 - Dallas
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Answers (11)

There is no direct correlation. Mortgage rates are determined by the Mortgage Backed Securities(mbs) market.
You will notice a transverse relationship with treasuries and MBS.

http://www.mortgagenewsdaily.com/mbs/

The link above is to MBS pricing. It is time delayed by 20 minutes or something.
  • April 26 2013
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There isn't one.

conventional conforming fixed rates will, as Tom provided in detail, follow MBS.

  • April 26 2013
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Profile picture for Blue Nile
Although there is no function that can describe the relationship between the two, and any attempt at curve fitting between the two will only apply for a limited time range for which the curve fit was done...

There is a "correlation" between the two, somewhere between 0 and 1.  Though I don't think there are any specific studies to determine a Pearson Product Correlation Coefficient, and likely it isn't constant over time.  My guess is it is about 50%; likely between 40% and 60% most of the time.

The reason they are "related" and not "completely independent variables" is that the same economic news and data that causes people to move their money from Stocks to bonds (including government Treasury bills) also causes people to move their money from Stocks to Securities (including Mortgage Backed securities).

And certainly the Federal Reserve has tried to intervene and manipulate both Mortgage Backed Securities and T-bills; but they are not treating them "equally" and change their polices fairly frequently on both.

So, yes, in general, they move in unison; but you can't just apply a multiplier and constant to get from one to the other.
  • April 26 2013
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I calculated the Person Correlation Coefficient, from December 2012 through present:

89.77% for 10 yr T-bill to ZMM 30 yr fixed quote averages
88.79% for 10 yr T-bill to ZMM 15 yr fixed quote averages

(It would be much lower if a longer time span was used)

But perhaps, one wants a linear regression curve fit instead?
  • June 22 2013
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Linear Regression:
30yr = 1.116 x Tbill + 1.312%
  R^2 = 80.6%
15yr = 0.753 x Tbill + 1.243%
   R^2 = 78.8%
where
Tbill = 10 yr T-bill annual yield (daily)
30yr = ZMM 30 yr fixed quote daily average
            $200k to $416k loan range, 740+ FICO, <80% LTV
15yr = ZMM 15 yr fixed quote daily average
            $200k to $416k loan range, 740+ FICO, <80% LTV

For December 2012 through present ONLY; the linear regression would need to be done again for a different time span.
  • June 22 2013
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Profile picture for Blue Nile
For April 2013 through present:
Linear Regression:
30yr = 1.150 x Tbill + 1.334%
  R^2 = 96.9%
15yr = 0.944 x Tbill + 0.89%
   R^2 = 94.9%

Obviously, the shorter time span improves the curve fit.  Notice how much closer R^2 (coefficient of determination) is to 100%.
  • June 22 2013
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Profile picture for Blue Nile
Here is a plot of that curve fit, for your visualization:



  • June 22 2013
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By the way, for graphical comparison purposes, I prefer to use no multiplier, and just an offset in multiples of 1/16%, since mortgage interest rates are typically quoted in 1/8% increments, with the difference being made up in fee adjustments/credits.

13/8% (1.625%) seems to work quite will as an "adder" to the Tbill yield presently for comparison to the 30 yr fixed quotes:



1.625% offset is very close to the 1.7% offset that the original poster suggested in his original post.  It seems to work much better presently than it did December through March.  I would use less offset if I was interested in those time periods.  Those blue horizontal lines represent 1/8% increments.  I would use 1.5% offset for December through March.
  • June 22 2013
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  • September 17 2013
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Profile picture for Blue Nile
Due to the FED tapering of Quantitative easing on Treasures, but not on Mortgage Backed securities, the two are becoming more decoupled, especially if one is looking at the effects during the day.

Here is yesterday's chart, using an offset of 25/16 for the 10 year treasury yield, and 5 minute updates on the treasury yield, 1 hour updates on the hourly Average ZMM 30 yr fixed rate quotes:




Here is September so far; 13/8% offset on the 10 yr treasury yield:



to see the images full size to read the text, right click on them and choose "view image".

For charts for other days, see the thread:
Rates on the Move Again.

New charts are being posted every business day, and the old charts are still posted with comments.
  • September 17 2013
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There is a loose correlation, only in that when 10 year treasuries are being bought up or sold off, mortgage backed securities are probably moving in the same direction. The best of us mortgage lenders pay for a serivce to guide us daily based on the trading of actual mortgage backed securities in real time.
But it is similar to the trading of a barrel of oil & the price you pay at the pump for a gallon of gas, rates are different all over the place. We have a lock in with float down policy. We lock in to a rate right away & if rates get better, we give you a better rate.
  • September 17 2013
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