Question

Based on current economic conditions, you expect the yield curve (i.e. the 10y – 3m spread on Treasuries) to flatten (i.e., 3m up, 10y down). Do you think that this would be a good or bad time to invest in 15-year mortgage fixed-rate agency pass-throughs? Why?

Answer 1

In the current economic scenario, the yield of long-term treasury bonds have fallen drastically and the yield of short term bonds has risen higher than that of long term treasury bonds. Experts are expecting an impending recession and this is because inversion of the yield curve, so I expect that the yield curve would be flatter in coming times because the economic scenarios are not going to get better.

This is because in the long run, if recession is here to stay the yield on long term bonds will be lower and the yield on short term bonds will try to equate them. This will lead to flattening of yield curve and it can sustain for a longer period of time.

I do think that this is a good time to invest in 15 year mortgage fixed rate agency pass through this is because the price at which yields are available are comparatively cheaper and in the long run if there is a recovery in the economy, this could be a very good because this would lead to you to very high rate of return if economy recovers and there is growth in coming decade.