How The 10-Year U.S. Treasury Note Impacts Mortgage Rates (2024)

FAQs

How The 10-Year U.S. Treasury Note Impacts Mortgage Rates? ›

Factors that influence mortgage rates

Historically, the 10-year U.S. Treasury yield has been considered a key benchmark for mortgage rates. However, mortgage rates are not actually based on the 10-year U.S. Treasury note (as is commonly believed). Fixed mortgage rates and Treasury yields generally move together.

There is a historically-wide difference between the 10-year treasury bond, a benchmark for pricing mortgages, and the actual price of an average 30-year loan. Usually around 1.75 percentage points, and as low as 1.3 in 2021, the so-called mortgage spread is hovering at more than 3 percentage points now.

Normally longer-term Treasury securities have higher yields than shorter-term ones. That's because the longer duration of those securities exposes them to more of a risk if interest rates rise over time. However, in advance of recessions, the rate structure of Treasury yields, often called the yield curve, can invert.

As the Fed funds rate rises, interest rates, including mortgage rates, tend to follow. Often, credit markets react before the Fed intervenes. When futures markets foresee lower interest rates, mortgage rates tend to decline in anticipation – even if the Fed has not yet cut rates.

The Federal Reserve doesn't directly set mortgage rates, but it does set the overall tone. The closest proxy for mortgage rates is the 10-year Treasury yield.

A higher cap rate spread implies greater risk, while a lower cap rate spread indicates less risk. The 10-year Treasury yield is therefore a proxy for risk in many industries, including real estate, to understand the current state of the economy and serve as a minimum rate of return hurdle for risky assets.

Considered one of the lowest-risk investments on the U.S. market, 10-year Treasurys are a “risk-free” benchmark against which other investments and debt are compared. (Three-month Treasury bills are another.) While no investment is ever completely risk-free, Treasury notes come close if held to maturity.

Rising yields can create capital losses in the short term, but can set the stage for higher future returns. When interest rates are rising, you can purchase new bonds at higher yields. Over time the portfolio earns more income than it would have if interest rates had remained lower.

10 Year Treasury Rate (I:10YTCMR)

10 Year Treasury Rate is at 4.31%, compared to 4.39% the previous market day and 3.84% last year. This is higher than the long term average of 4.25%.

What is causing mortgage rates to go up? ›

Inflation influences how lenders set their mortgage rates. Consumers are likely to borrow more during periods of economic growth, which often leads to higher interest rates. Although the Fed doesn't set them, mortgage rates are impacted by the Fed funds rate.

The Fed's decision to hold rates steady won't have a dramatic or immediate impact on home loan rates. Instead, mortgage rates will respond to inflation, investor expectations and the broader economic outlook. The general consensus, though, is that mortgage rates should start going down at the end of 2024.

Economists and housing market experts agree that mortgage rates will fall over the next several years, but not below 3%.

When the yield curve is upward sloping, rates tend to increase over time and current mortgage rates are likely to be lower than future mortgage rates. Households are more likely to stay with their mortgages for extended periods, making mortgages a long-duration asset.

The lower your interest rate, the less interest you pay over time, and the less expensive it is to borrow the money in your mortgage.

Rising Treasury yields often lead to higher borrowing costs, which can affect property valuations, investment returns, and project feasibility. Conversely, falling Treasury yields may present opportunities for favorable financing terms and increased investment activity in the CRE sector.