Historically Low Mortgage Spreads

Below is a great chart courtesy of David Rosenberg of Gluskin Sheff showing the historical spread of 30 mortgages to treasuries. Historically, this spread is 150bps, but now stands at a measly 20bps. As discussed several times on this blog, the huge compression in mortgage spreads to treasuries reflects the Federal Reserve’s $1.25 trillion MBS buying program, which is slated to end by the end of March. While the Fed could decide to extend the program or use Fannie & Freddie as a backdoor conduit to support the mortgage market (since both organizations now have more flexibility on when they have to shrink their balance sheets), the prospect of higher mortgage rates seems very likely as we progress through 2010.