No, Mortgage Rates Aren't Based on 10yr Treasury Yields

By: Matthew Graham •

Mortgage rates have been putting on a rather frustrating and exciting show in the month of August.  On the one hand, they're at or near their lowest levels in 3 years.  On the other hand, they're not nearly as low as you'd expect them to be based on movement in markets that almost always track mortgages in lock-step. 

The 10yr Treasury yield, above all other interest rates has long been thought to dictate mortgage rate movement.  That's a complicated thesis to evaluate, because it's true and false at the same time.  It's certainly true that Treasuries set the tone for almost any interest rate in the US.  They're like an aircraft carrier and other rates are like planes, helicopters, soldiers, rafts, boats, and unmanned submersibles that are along for the ride.  At any given time, mortgage rates may or may not be on the deck of the USS 10yr Yield, but as long as the seas are calm, they're generally not far.

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In rare cases, the USS 10yr can move too quickly or erratically for mortgages and the latter can jump ship and opt to follow along in their own little row boat.  The faster the big boat moves and the more erratically it moves, the harder it is for the little boat to catch up.  If things are crazy enough, the little boat may just camp out on a convenient nearby desert island until the volatility blows over.  That's basically where we are now when it comes to the mortgage vs Treasury relationship.

Of course there are factual and objective underlying reasons for this, but it's much easier to understand in terms of the analogy.  The net effect is that the bonds that actually dictate mortgages (Mortgage-backed-securities or MBS) haven't made it to any better levels than they saw on August 5th.  In fact, they didn't even make it past yesterday's best levels today, even though 10yr yields hit a low of 1.471% after yesterday's low of 1.508% (US hours).  The net effect of that net effect is that mortgage lenders simply don't have much to work with when it comes to pushing rates any lower.  Even if they did, it would still be slow going because mortgage lenders have a similar relationship with MBS as MBS have with Treasuries.  

Bottom line: rates aren't as low as you think they should be if you're a person who follows the 10yr.  And it's going to take weeks if not months for the mortgage market to hop in its dinghy and row row row back toward the big boat.


Loan Originator Perspective

Bond markets posted fairly impressive gains Tuesday, although (as has been typical lately), rate sheets didn't fully reflect the gains.  There's minimal data on tap until Friday, and with the Labor Day weekend looming, it promises to be a fairly sedate week.  I'm locking most September closings, floating loans with longer lead times. -Ted Rood, Senior Originator 

MBS still have a lot of room to improve compared to current treasuries yields.   At this time, my clients are floating until they are within 15 days of closing.  This allows time for the spread between mbs and treasuries to hopefully tighten. -Victor Burek, Churchill Mortgage


Today's Most Prevalent Rates

  • 30YR FIXED - 3.5 - 3.625%
  • FHA/VA - 3.25-3.5%
  • 15 YEAR FIXED - 3.125 - 3.375% 
  • 5 YEAR ARMS -  3.375-3.75% depending on the lender


Ongoing Lock/Float Considerations 

  • 2019 has been the best year for mortgage rates since 2011.  Big, long-lasting improvements such as this one are increasingly susceptible to bounces/corrections.

  • Fed policy and the US/China trade war have been key players

  • The Fed and the bond market (which dictates rates) will be watching economic data closely, both at home and abroad, as well as trade war updates. The stronger the data and trade relations, the more rates could rise, while weaker data and trade wars will lead to new long-term lows.  
  • Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders.  The rates generally assume little-to-no origination or discount except as noted when applicable.  Rates appearing on this page are "effective rates" that take day-to-day changes in upfront costs into consideration.