Modeling the Mortgage-Treasury Spread

Journal of Fixed Income, Fall 1997

Posted: 5 May 1998

See all articles by Laurie S. Goodman

Laurie S. Goodman

The Urban Institute - Housing Finance Policy Center

Jeffrey Ho

Paine Webber

Abstract

This is a discussion of the fundamentals underlying a proprietary thirty-year conventional perfect current-coupon projection model. This model measures the richness or cheapness of the current-coupon mortgage as a function of the fundamental variables that influence mortgage pricing: the level of rates, the shape of the curve, and volatility. It is designed not to provide an automatic trading rule but rather to serve as a starting point for looking at the mortgage-Treasury spread in a consistent fashion. While the model has a number of limitations, a performance study using two different consistent trading rules finds quite favorable results: the model performed well in 1993, 1994, and 1995.

JEL Classification: G12

Suggested Citation

Goodman, Laurie S. and Ho, Jeffrey, Modeling the Mortgage-Treasury Spread. Journal of Fixed Income, Fall 1997, Available at SSRN: https://ssrn.com/abstract=83869

Laurie S. Goodman (Contact Author)

The Urban Institute - Housing Finance Policy Center ( email )

2100 M Street NW
Washington, DC 20037
United States

Jeffrey Ho

Paine Webber

1285 Avenue of the Americas
New York, NY 10019
United States

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