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People who want higher profits from mortgage-backed investments may reduce the effect of lower mortgage rates

By ALEX VEIGA (AP Business Writer) LOS ANGELES (AP) — Mortgage rates are expected to come down later this year, but any benefit to homebuyers could be muted by developments in the market for financial instruments tied to mortgages. Over

By ALEX VEIGA (AP Business Writer)

LOS ANGELES (AP) — Mortgage rates are expected to decrease later this year, but any advantage to homebuyers could be lessened by changes in the market for financial instruments linked to mortgages.

In the past few years, doubts about inflation and the path of mortgage rates caused investors to ask for higher profits from owning mortgage-backed securities compared to what they would earn from buying the government’s 10-year Treasury bonds.

Mortgage-backed securities, or MBS, are investments made up of home loans and, like bonds, pay interest to investors. The difference in the interest, or yield, offered by each of these types of investments can be determined by comparing mortgage rates and U.S. government bond yields.

In the past, the difference averaged around 1.7% a month. Last year, it increased significantly, reaching nearly 3% in June — the largest gap since August 1986, according to Federal Reserve data.

“When rates started rising, essentially we really didn’t know how high they would go or (for) how long,” said Mark Fleming, chief economist at First American Financial. “Mortgage-backed securities investors said ‘I need to charge you more over the risk-free 10-year Treasury rate to be willing to buy a mortgage-backed security.’”

The bond and mortgage markets are affected by inflation, Federal Reserve interest rate policy and other factors. Signs of lower inflation and indications from the Fed that it might start reducing its short-term rate this year have helped bring down mortgage rates and bond yields after they reached multiyear highs in October.

These changes have affected the difference between the average rate on a 30-year mortgage and the 10-year Treasury yield, causing it to mostly decline this year. Last month, it was down to 2.61%.

However, even though it's lower than before, the difference is still higher than usual, and this puts pressure on mortgage rates. This leads to higher borrowing costs for homebuyers.

For example, the 10-year Treasury yield averaged 4.21% last month, while the average rate on a 30-year mortgage was 6.82%. If the difference had been normal, the average home loan rate would have been about 5.91%.

So, even if mortgage rates decrease further this year, as experts expect, the still-high difference between mortgage rates and bond yields will limit potential savings for homebuyers.

“For the potential homebuyer or the homeowner thinking about selling, any rate relief is a positive thing,” Fleming said. “But it may take more to really make a big difference in what a monthly payment would look like.”

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