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Determinants of Mortgage Interest Rates: Treasuries versus Swaps

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  • C. Sirmans

    ()

  • Stanley Smith

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  • G. Sirmans

    ()

Abstract

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. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • C. Sirmans & Stanley Smith & G. Sirmans, 2015. "Determinants of Mortgage Interest Rates: Treasuries versus Swaps," The Journal of Real Estate Finance and Economics, Springer, vol. 50(1), pages 34-51, January.
  • Handle: RePEc:kap:jrefec:v:50:y:2015:i:1:p:34-51
    DOI: 10.1007/s11146-013-9445-9
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    References listed on IDEAS

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    1. Allen, Marcus T & Rutherford, Ronald C & Wiley, Marilyn K, 1999. "The Relationships between Mortgage Rates and Capital-Market Rates under Alternative Market Conditions," The Journal of Real Estate Finance and Economics, Springer, vol. 19(3), pages 211-221, November.
    2. Nippani, Srinivas & Smith, Stanley D., 2010. "The increasing default risk of US Treasury securities due to the financial crisis," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2472-2480, October.
    3. Saul B. Klaman, 1961. "The Postwar Residential Mortgage Market," NBER Books, National Bureau of Economic Research, Inc, number klam61-1, March.
    4. Patric H. Hendershott & James D. Shilling & Kevin E. Villani, 1983. "Measurement of the Spreads Between Yields on Various Mortgage Contracts and Treasury Securities," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 11(4), pages 476-490, December.
    5. Jack M. Guttentag & Morris Beck, 1970. "New Series on Home Mortgage Yields Since 1951," NBER Books, National Bureau of Economic Research, Inc, number gutt70-1, March.
    6. Rothberg, James P & Nothaft, Frank E & Gabriel, Stuart A, 1989. "On the Determinants of Yield Spreads between Mortgage Pass-Through and Treasury Securities," The Journal of Real Estate Finance and Economics, Springer, vol. 2(4), pages 301-315, December.
    7. Feldhütter, Peter & Lando, David, 2008. "Decomposing swap spreads," Journal of Financial Economics, Elsevier, vol. 88(2), pages 375-405, May.
    8. Jack M. Guttentag & Morris Beck, 1970. "Appendices to "New Series on Home Mortgage Yields Since 1951"," NBER Chapters,in: New Series on Home Mortgage Yields Since 1951, pages 189-350 National Bureau of Economic Research, Inc.
    9. J. Sa-Aadu & James Shilling & George Wang, 2000. "A Test of Integration and Cointegration of Commercial Mortgage Rates," Journal of Financial Services Research, Springer;Western Finance Association, vol. 18(1), pages 45-61, October.
    10. Ramchander, Sanjay & Simpson, Marc W & Webb, James R, 2003. "Macroeconomic News and Mortgage Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 27(3), pages 355-377, November.
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