The relationships between mortgage rates and capital-market rates under alternative market conditions

Mortgage interest rates have become more integrated with other capital-mark et interest rates over recent decades, apparently as a result of the deregu lation of financial markets. The link is both imperfect and time-varying. M ortgage rates during some time periods appear to be "sticky" with respect t o their adjustment to changes in capital-market rates. We examine the relat ionship between weekly conventional mortgage rates and the interest rates o n treasury and corporate securities under differing market conditions. We d raw three conclusions based on the analysis. First, deregulation changed th e link between mortgage rates and riskless interest rates, which confirms t he findings of Goebel and Ma (1993). Second, mortgage rates were cointegrat ed with risky interest rates even before deregulation. Third, the link betw een mortgage rates and the risky bond rate can be associated with the behav ior of the risk premium in the bond rate. The observed relationship is cons istent with the stickiness observed by Haney (1988) and causes a more prono unced stickiness when rates are falling than when they are rising.