Last week, the U.S. Treasury yield curve inverted, not for the first time, but now adding to this high-risk event an unprecedented inversion of thirty-year rates below short-term ones during a period when rates are already often below the zero lower bound after taking inflation into account. As with the rest of U.S. finance, mortgages have been realigned by a decade of rates often below the real zero lower bound. However, the potential for still more rate cuts in concert with a gyrating curve poses unprecedented problems not only to mortgage origination and securitization, but also to near-term decisions by Treasury, FHFA, bank regulators, and Ginnie Mae. Based on our assessment of forward-looking rate trends and their strategic impact, we here analyze the policy implications of prolonged inversion in concert with negative rates.
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