Over the course of the second quarter, a considerable rise in long-term interest rates resulted in a steepening of the yield curve for U.S. Treasuries, which is indicative of a widening differential between short- and long-term yields.  The yield curve steepened despite rising yields across the maturities spectrum as inflationary pressures permeated the U.S. bond markets.  Taking this into account, however, rates are still low relative to historical standards.

Historically benchmarked to comparable term Treasury yields, interest rates for whole mortgages have not risen in lockstep with the steepening yield curve despite rising rates.  This suggests that lenders have been pricing to absolute returns with lower effective spreads for permanent fixed-rate mortgages the logical result of this pricing strategy so long as yields continue to rise.  The 1-month LIBOR, which set at 0.31 on June 30 after dropping 10 basis points over the trailing 30-day period, provides further evidence of improved liquidity in the inter-bank loan market supported by a growing consensus on the cost of capital.  Looking forward, all eyes will be on the Fed and how it manages long-term rates going forward.