Narrowing in spread tempers rise in mortgage rates

The impact of higher Treasury yields on mortgage rates has been softened by a narrowing of the spread between the two. That reflects a fall in the option cost of prepayment risk, as higher mortgage rates will cut the number of refinances. But, with lenders’ servicing costs now higher thanks to tougher regulations, and the Fed gradually reducing their MBS holdings, we doubt that narrowing has much further to run.