The Spread is Back

[Zach Wain]

The Spread Is Finally Back: 

For the past few years, lenders have been yelling about the same thing: the spread—the gap between the 10-year Treasury and the 30-year fixed mortgage rate. Historically, that spread lives around 150–200 bps.

Since 2022? We’ve been stuck in 250–300 bps territory, which meant borrowers were paying a straight-up volatility tax.

Here’s the good news: the spread has finally normalized.

The Numbers: A Strange (but Welcome) Paradox

If you’ve been watching the 10-year Treasury, the largest bond by volume and an easy way to loosely track mortgage rates, you’ve seen it move higher. It’s sitting around 4.24%, up meaningfully from the sub-4% levels we saw not long ago.

In the 2023–2024 world, a 4.24% Treasury would have translated to low-7% mortgage rates without question.

Instead, 30-year fixed rates are holding steady—or even improving. Why?

Because the spread has tightened to roughly 175 bps.

The $200B Elephant in the Room

You can’t talk about this shift without addressing the catalyst: the $200B executive order directing Fannie Mae and Freddie Mac to purchase MBS.  The buying and selling of MBS (Mortgage Backed Securities - mortgage bonds) dictates the daily changes in mortgage rates.

By positioning the GSEs as a buyer of MBS, the government effectively reset market psychology. That liquidity injection did two big things:

• Reduced risk premiums – Investors no longer need to price in extreme uncertainty with a $200B backstop in place.

• Compressed the spread – The gap between Treasury yields and mortgage rates finally snapped back to historical norms.  More buyers = reduced price for MBS.

What This Means for Buyers (and Your Pipeline)

The “volatility tax” is gone. Even if the 10-year remains elevated due to inflation, deficits, or macro noise, mortgage rates are no longer being inflated by fear alone.

Then:
4.25% Treasury + 290 bps spread = 7.15% rate

Now:
4.24% Treasury + 175 bps spread = 5.99% rate

That delta is massive and hopefully it gets lot of sidelined buyers to make a move. For the first time in a while, we’re seeing a market driven by fundamentals—not panic—and that’s a very different conversation to be having with clients.  30 yr fixed rates are the low 6's or even high 5's, is that enough to get buyers off the fence?