Determinants of Mortgage Interest Rates: Treasuries versus Swaps
Posted: 6 Jan 2015
Date Written: January 5, 2015
The 10-year Treasury rate has long been considered the primary determinant of 30-year mortgage interest rates. The contemporaneous 10-year LIBOR swap rate is shown to better explain the contemporaneous mortgage rate than the contemporaneous 10-year Treasury rate. This result appears to hold over most of the sample period, 1987-2011, using a variety of statistical tests. Given the long-held belief that the mortgage rate is best explained by the 10-year Treasury rate, this paper makes an important contribution to the literature by demonstrating that the swap rate is superior.
Keywords: Treasury rate; Mortgage rate determinants; Swap derivatives; LIBOR swap rate
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