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Why Mortgage Rates Exceed Treasury Yields

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Abstract

The mortgage spread—the gap between the 30-year fixed mortgage rate and the yield on 10-year U.S. Treasury notes—is currently about 200 basis points, or 2 percentage points. Mortgages and Treasury securities have different cash flows, credit risk, and lender intermediation margins, but even after those differences are accounted for, a large and volatile gap remains. In this brief, the author argues that this remaining gap largely reflects the price of the mortgage prepayment option—a borrower’s right to pay off their mortgage at any time without incurring a penalty.

Suggested Citation

  • Paul S. Willen, 2026. "Why Mortgage Rates Exceed Treasury Yields," Current Policy Perspectives 26-3, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbcq:103270
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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