The mortgage market should remain robust even if the 10-year Treasury yield rises to 1.5%, and the economy continues to recover, a report from Keefe, Bruyette & Woods said.
The yield on the 10-year Treasury moved up significantly this week, following the news that Pfizer has a COVID-19 vaccine that is reportedly 90% effective. The yield broke above 0.9% for the first time since June. The last time the 10-year yield was above 1% was on March 18.
The 10-year yield is used as a benchmark to price 30-year fixed rate mortgages. A spread of 200 basis points between the 10-year Treasury and the 30-year FRM was reported by Optimal Blue on Nov. 9. If that spread holds, it would indicate mortgage rates rising to 4.25% to 4.5% in KBW’s scenario.
The latest Freddie Mac Primary Mortgage Market Survey put the 30-year conforming FRM at
“We think the mortgage insurers are the best recovery play in our mortgage universe,” Bose George, an analyst for KBW, said in a report. “Higher interest rates are neutral to positive for the sector as long as they are not high enough to impede the housing market.”
During the third quarter, four of the six active underwriters reported
George predicted that mortgage originators will take the biggest hits as the broader economy recovers, given that rising interest rates could slow refinance activity
“While this is unlikely to change our 2022 earnings per share estimates (which already assume normalized refinance activity), it could materially reduce 2021 EPS estimates,” George said. “That being said, we believe that the 10-year yield would likely have to rise to the 1.25% or higher range before volume expectations change in any meaningful way.”
Besides the MI companies, title insurers are likely to benefit if interest rates continue to move up, George said.
“While
KBW predicts that publicly traded mortgage lender
But Rocket Cos., which