The 10-year Treasury bond serves as a key benchmark that significantly influences mortgage interest rates, though the relationship isn’t perfectly synchronized.
How the Connection Works
Mortgage rates typically track 1-3 percentage points above the 10-year Treasury yield. When the 10-year yield rises, mortgage rates generally follow upward, and when it falls, mortgage rates tend to decrease as well. This happens because both are long-term debt instruments that compete for similar investor dollars.
Why This Relationship Exists
Mortgage-backed securities (which bundle home loans together) are often compared to Treasury bonds by investors. Since Treasuries are considered risk-free government debt, mortgages must offer higher returns to compensate for additional risks like default potential and prepayment risk. The 10-year Treasury provides the baseline “risk-free” rate that other long-term investments are measured against.
Factors That Can Cause Divergence
The relationship isn’t always tight. Mortgage rates can move independently due to:
- Credit market conditions and lending standards
- Housing market demand and supply
- Federal Reserve policy specifically targeting mortgage markets
- Investor appetite for mortgage-backed securities versus Treasuries
- Economic uncertainty that makes lenders more cautious
Current Market Dynamics During periods of economic stress, investors often flee to Treasury bonds for safety, driving yields down. However, mortgage rates might not fall as much if lenders become more risk-averse about home loans. Conversely, in strong
Save as Image
Leave a Reply