Mortgage Rates and the Corporate Bond Index at the Time of QEs in California

Abstract

There are a slew of factors that affect interest rates. A common belief is that the movement of the 10-year Treasury bond yield is the best indicator of the future level of mortgage rates. The mortgage rate is undoubtedly one of the most important factors that affect affordability of housing. On the demand side, it affects the availability of mortgage loans to potential home buyers. Although information on mortgage interest rates is becoming more available, it still is not as easily available as information on bond yields. During the recent, sub-prime loan induced financial crisis, the government intervened extensively in the bond and mortgage markets through various quantitative easing (QE) mechanisms, both directly and indirectly. In this paper, we estimate the extent of the impact of these government policies on the relationship between bond yields and mortgage rates. Our results show that QE policies indeed distorted this relationship.