Long Term Perspective

The spread relationship between this group of bonds (government agency, mortgage-backed, and asset-backed) and the 10-year Treasury note yield appears a bit odd because one would still expect the U.S. Treasury security to have a lower risk yield than any of these other securities. It is possible that government agency bonds have a lower average yield than the 10-year note because the average maturity of bonds measured in this compilation is not uniform. If government agency bonds have a shorter maturity – such as 5 years rather than 10 years, the government agency issues can have lower yields than the average 10-year Treasury security. However, the normal relationship mostly returned in 2005 and 2006 as these bond rates rose faster than 10-year Treasury rates.  But since the recession and ensuing modest recovery, agency yields slipped relative to mortgage and asset-backed bonds due to flight to quality.

 

Similarly, asset-backed bonds could have a shorter maturity than the 10-year note, thus creating nominal yields that are lower than the longer-term Treasury security. Mortgage-backed bonds seemed to hold a steady relationship during the 1990s, but the spread differential narrowed from the 1980s to the 90s to the 2000 to 2004 period. This is primarily due to the vast amount of refinancing activity that occurred in those years.  In recent years, the yield on mortgage-backed securities has been brought down by Fed easing and by the Fed's addition of these securities to its balance sheet expansion.

 

In 2009, mortgage and asset-backed bond yields declined on an easing in the recession and improved credit markets.  Yields on mortgage and asset-backed securities also eased with help from the Fed adding huge amounts of these to its balance sheet from 2009 into very early 2013.  Worries about Fed taper bumped rates up in mid-2013 but worries about global growth weighed on rates in 2014.

 

 

 

Short Term Perspective

Worries about the Fed cutting back on asset purchases bumped rates up in 2013.  Yields on mortgage-backed bonds eased somewhat in 2014 on belief that the Fed would not speed up its taper schedule which became scheduled to end October 2014 and actually took place on schedule.  Flight to safety kept rates low in early 2015.

 

In March, the government agency spread posted at minus 81 basis points; the spread on mortgage-backed bonds, minus 28 basis points; and the spread on asset-backed bonds, minus 60 basis points.

 

Yields in this segment were down in March with yields for asset-backed bonds down 13 basis points; mortgage-backed bonds 14 basis points; and government agency bonds down 9 basis points to 1.44 percent, 1.76 percent, and 1.23 percent, respectively.  The yield on the 10-year Treasury note firmed 6 basis points to 2.04 percent.