Impact of 10-Year Treasury Yield on Mortgage Interest Rates
The 10-year Treasury yield, the government's borrowing cost for a decade, plays a significant role in shaping the mortgage market. As a benchmark for mortgage rates, changes in the 10-year Treasury yield can have a direct impact on the cost of home loans.
When the Federal Reserve sets the federal funds rate, it serves as a benchmark for short-term rates. However, the 10-year Treasury yield, due to its longer duration, is more closely related to mortgage rates. This is because mortgage lenders benchmark rates on the yields of long-term government bonds.
Mortgages are longer-term loans, and investors who buy mortgage-backed securities look for returns competitive with comparable Treasury yields, plus some risk premium. As a result, when the 10-year Treasury yield rises, mortgage rates generally increase, making borrowing more expensive and affecting home affordability. Conversely, when the 10-year Treasury yield falls, mortgage rates often drop, lowering borrowing costs.
The 10-year Treasury yield is influenced by several factors, including monetary policy, economic growth, inflation expectations, and the term premium.
Monetary policy, as set by the Federal Reserve, plays a crucial role in shaping investor expectations about future rates and inflation, thereby influencing the 10-year yield. Economic growth boosts investor confidence, often decreasing demand for safe assets like Treasuries and pushing yields higher. Conversely, economic uncertainty or slower growth increases demand for Treasuries, lowering yields.
Inflation expectations also play a significant role in determining the 10-year Treasury yield. If investors expect higher inflation, they demand higher yields to maintain real returns. The term premium, on the other hand, is a risk premium investors require to compensate for risks specific to long-term bonds, such as inflation shocks or economic disruptions over the decade.
Shopping around for the best mortgage rate is an effective way to lower total loan cost, ensuring you don't overpay on a significant investment. Today, mortgage rates are lower than they were last year, with the average rate on a 30-year mortgage being 6.72%. You can compare and find today's mortgage rates using the tool from Bankrate.
In times of economic uncertainty or slower job growth, investors might seek safer investments, such as treasury bonds, causing the 10-year Treasury yield to decrease. Higher inflation leads investors to seek higher interest rates, which is why mortgage rates are currently close to 7%. The Federal Reserve has cut interest rates three times by the end of 2024, but mortgage rates did not follow suit.
In conclusion, understanding the factors influencing the 10-year Treasury yield can help homebuyers make informed decisions about mortgage rates. By staying informed about economic growth, monetary policy, inflation expectations, and the term premium, homebuyers can find the best mortgage rates and make the most of their investment.
In personal-finance terms, changes in the 10-year Treasury yield can directly impact the cost of home loans through mortgage rates, making it crucial for homebuyers to stay informed about these factors. Investing in mortgage-backed securities, where returns are competitive with Treasury yields, means that mortgage rates generally increase when the 10-year Treasury yield rises and decrease when the yield falls.
