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Mortgage Twist Presents Fed With a Puzzle


Lower interest rates don't automatically mean cheaper mortgages.

On Wednesday, the Federal Reserve will conclude its latest policy meeting and may announce further measures aimed at lowering long-term borrowing costs. One option is called "Operation Twist:" the Fed would sell some of its short-term holdings and buy longer-term U.S. debt to push yields—which are already at historic lows—even lower.

Why? One clear aim of Fed policy, as Chairman Ben Bernanke wrote in an op-ed last year, is to bring about "lower mortgage rates [that] will make housing more affordable and allow more homeowners to refinance."

The trouble is, the relationship between Treasury yields and mortgage rates isn't perfect. And in recent weeks, the difference, or spread, between the 10-year Treasury yield and Freddie Mac's average 30-year fixed-rate mortgage has widened considerably.

As of last week, the difference between these two was more than two percentage-points. That compares with a low of about 1.3 percentage-points as recently as April.


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