With risk-free interest rates not set to drop any further, and home sales constrained by record low inventory, the cost of the prepayment option on MBS will have fallen. Alongside Fed purchases of MBS, that helps explain the recent narrowing in the spread between 30-year mortgage rates and the 10-year Treasury yield. We expect it will edge back further, keeping mortgage rates close to 2.8% over the next couple of years.
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