A Look Into The Markets - August 29, 2025

Back on Friday Aug 22nd, the quote above by Fed Chair Jerome Powell was the marketing moving statement which led the markets to feel that a rate cut is coming at the September meeting.

His other big quote, which amplified the notion of a cut and lowered the fears of inflation was this...

"A reasonable base case is that the effects (from tariffs) will be relatively short lived—a one-time shift in the price level."

Since the Jackson Hole speech the probability of a Fed rate cut at the September 17th Fed Meeting has climbed to nearly 90% from beneath 70% pre-Jackson Hole.

Mortgage Spread Narrows to 3-Year Low

Another reason mortgage rates fell to their lowest levels since early October is that the spread between the 10-year Treasury note and 30-year mortgage rates has narrowed to its lowest level in three years.

Mortgage Spread Explained

1. The 10-year Treasury note is a benchmark for many interest rates because it's considered a safe investment backed by the U.S. government.
2. Mortgage rates (like the 30-year fixed) are typically higher than the 10-year Treasury yield because mortgages carry more risk (e.g., borrowers might default).
3. The spread is calculated as: Mortgage Rate - 10-Year Treasury Yield = Spread
4. For example, if a 30-year mortgage rate is 6.5% and the 10-year Treasury yield is 4%, the spread is 6.5% - 4% = 2.5%.

What Causes the Mortgage Spread to Narrow

1.  Improved Market Confidence and Liquidity: When investors and lenders feel more confident about the economy and the mortgage market, they demand less of a risk premium for mortgage-backed securities (MBS). This reduces the spread, as MBS prices rise (lowering yields) and mortgage rates align closer to Treasury yields.
2. Lower Perceived Risk in Mortgages: Factors like reduced prepayment risk (when borrowers refinance or pay off loans early) or lower default risk can make mortgage bonds more attractive. Investors require less yield to compensate for risk, narrowing the spread.
3. Federal Reserve or Monetary Policy Actions: If the Fed lowers interest rates or resumes buying mortgage-backed securities (as during quantitative easing), MBS prices increase, lowering mortgage yields and tightening the spread with Treasuries.
4. Stable or Improving Economic Conditions: In a stable economy with predictable inflation and growth, the risk premium for mortgages decreases. This can bring mortgage rates closer to Treasury yields, as investors see less uncertainty.