Just as in the past, high yield bonds trade at an interest rate spread over Treasury bonds, which are more liquid and less subject to default risk.

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However, the average cap rate spread over the 10 year treasury yield has been 360 bps during that period, which compares to 430 bps today.

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The remaining spread of the mortgage rate over the Treasury yield represents the risk of prepayment and underwriting costs.

WSJ: Low-Interest Mortgages Are the Answer

Here is a chart which shows the credit spread of high yield bonds vs. the default rate of high yield bonds since 1997.

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The company makes money from the spread between the interest rate paid by a hog buyer and the yield built into the sale of a package of loans on Wall Street.

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That yield spread is dwarfed by the potential gain (or loss) from exchange-rate shifts.

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Hence a 4.5% mortgage rate is 2.2% above the Treasury yield, above the 1.6% spread that would prevail in a normally functioning mortgage market.

WSJ: Low-Interest Mortgages Are the Answer