Determinants Of Mortgage Interest Rates: Treasuries Versus Swaps

The 10-year Treasury rate has long been considered the primary determinant of 30-year mortgage interest rates. The contemporaneous 10-year LIBOR swap rate is shown to better explain the contemporaneous mortgage rate than the contemporaneous 10-year Treasury rate. This result appears to hold over most of the sample period, 1987–2011, using a variety of statistical tests. Given the long-held belief that the mortgage rate is best explained by the 10-year Treasury rate, this paper makes an important contribution to the literature by demonstrating that the swap rate is superior

CDS Momentum: Slow-Moving Credit Ratings and Cross-Market Spillovers

This paper highlights the adverse consequences of sluggish credit rating updates in creating information efficiency distortions and investment anomalies. We first document significant credit default swap (CDS) return momentum yielding 7.1% per year. We further show that cross-market momentum strategies based on information in past CDS performance generates an alpha of 10.3% per year in stocks and 7.3% per year in bonds. These CDS momentum and cross-market effects are stronger among more liquid, informationally rich CDS contracts whose CDS spreads move in anticipation of important, yet slow-moving, credit rating changes.Y