Impact of 10-Year Treasury Yield on Mortgage Interest Rates
Mortgage rates, particularly 30-year fixed rates, have a close relationship with the 10-year Treasury yield. This connection exists because both reflect long-term borrowing costs. When the 10-year Treasury yield rises, mortgage rates tend to increase, and when it falls, mortgage rates usually decrease.
This relationship is based on the fact that mortgage rates are often set by adding a spread (a risk premium) over the 10-year Treasury yield, which is considered a nearly risk-free benchmark. Mortgages carry more risk than Treasury bonds, so lenders demand a higher return, but the Treasury yield serves as a baseline.
Several economic factors influence this relationship. The Federal Reserve's policies impact short-term rates and investor expectations for the future, indirectly affecting the 10-year yield and thus mortgage rates. Economic growth prospects and market risk appetite also play a role, as demand for Treasuries and mortgage-backed securities can change in uncertain times. Inflation expectations can push yields and mortgage rates higher because investors want compensation for eroding purchasing power.
In summary, mortgage rates track the 10-year Treasury yield closely but remain somewhat higher due to added risks associated with lending. Changes in the yield are considered a leading indicator of mortgage rate trends.
Currently, mortgage rates are lower than they were last year. The 10-year Treasury yield, which influences mortgage rates, is currently 4.21%. The average rate on a 30-year mortgage is 6.72%. Shopping around for the best mortgage rate is one of the more effective ways to lower total loan cost.
When investors buy mortgage-backed securities, they are investing in a package of mortgage loans for a longer term. The mortgage spread, the difference between your mortgage rate and the 10-year treasury yield, consists of two parts: the primary-secondary spread and the secondary spread. The primary-secondary spread factors in mortgage origination fees, other lender costs, and profits. The secondary spread covers some risks investors might face.
It's important to note that while the Federal Reserve has cut interest rates three times by the end of 2024, mortgage rates did not follow suit. An increased risk of prepayment can cause the spread to increase since investors won't maximize returns if the mortgage ends prematurely.
To compare today's mortgage rates, you can use the tool from Bankrate. By doing so, you ensure you don't have to overpay on what could be the biggest investment you'll make.
Investing in mortgage-backed securities involves purchasing a package of mortgage loans for a longer term, which corresponds to the investing aspect of personal-finance. The mortgage spread, a difference between the mortgage rate and the 10-year treasury yield, is directly influenced by changes in the 10-year Treasury yield, thereby impacting personal-finance through long-term borrowing costs.
