Recent research has asserted that before 1980, mortgage and capital markets in the USA were not cointegrated as a result of credit rationing, but deregulation of financial institutions led to cointegrated mortgage and capital markets during the 1980s. In this paper, we investigate the causality and cointegration relationship between the mortgage and treasury yields. Our findings suggest that the mortgage and treasury yields are cointegrated before, but not cointegrated after, 1982. To circumvent the non-cointegration problem, this paper introduces a time-varying cointegration approach to the issue. It extends the cointegration theory in such a way that the cointegrating parameter is allowed to follow a smooth function of time. We apply this technique to study the cointegration relationship between the US mortgage and capital markets and find that they are cointegrated after 1982 with time-varying cointegrating parameter.