Determinants of Mortgage Interest Rates: Treasuries versus Swaps
The 10-year Treasury rate has long been considered the primary determinant of 30-year mortgage interest rates. The contemporaneous 10-year LIBOR swap rate is shown to better explain the contemporaneous mortgage rate than the contemporaneous 10-year Treasury rate. This result appears to hold over most of the sample period, 1987–2011, using a variety of statistical tests. Given the long-held belief that the mortgage rate is best explained by the 10-year Treasury rate, this paper makes an important contribution to the literature by demonstrating that the swap rate is superior.
KeywordsTreasury rate Mortgage rate determinants Swap derivatives LIBOR swap rate
- Guttentag, J. M., & Beck, M. (1970). New series on home mortgage yields since 1951. New York: Columbia University Press for NBER.Google Scholar
- Haney, R. L., Jr. (1988). Sticky mortgage rates: Some empirical evidence. Journal of Real Estate Research, 3, 61–73.Google Scholar
- Haubrich, J. G. (2001). Swaps and the swaps yield curve. Federal Reserve Bank of Cleveland: Economic Commentary.Google Scholar
- Klaman, S. B. (1961). The postwar residential mortgage market. Princeton: Princeton University Press for NBER.Google Scholar
- Nippani, S., & Smith, S. D. (2012). Analyzing the changing term structure and expectations of U.S. treasury default risk. Journal of Fixed Income, 22(1), 52–60.Google Scholar
- Roth, H. L. (1988). Volatile mortgage rates—A new fact of life? Economic Review, 16–28.Google Scholar
- Taibbi, M. Everything is rigged: The biggest price-fixing scandal ever. RollingStones.com, April 25, 2013, http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425.
- Wooldridge, P. D. (2001). The emergence of new benchmark yield curves. BIS Quarterly Review, 48–57.Google Scholar