Mortgage rates may feel unpredictable day to day, especially in periods of heightened volatility like we have seen recently with court rulings on tariffs, the war in Iran, and broader international unrest. STRATMOR’s clients and lenders around the nation are dealing with this and trying to hedge pipelines in a volatile market. Meanwhile, originators are trying to work with borrowers to identify the best program to fit their needs at a competitive rate. And C-level executives are keeping an eye on rates, and the forecast for potential rate adjustments to complete reasonable predictions of future volumes and how they can prepare for the up and downs of the market.
Mortgage interest rates are not random but are influenced by several forces, including financial markets, economic data, government policy, and borrower characteristics.
One indicator stands out as a reliable guide to their direction: the yield on the 10-year U.S. Treasury bond. Although mortgages are commonly structured as 30-year loans, most notably the 30-year fixed-rate mortgage, the typical homeowner does not hold a mortgage for that entire period. In reality, many borrowers sell their homes, refinance, or otherwise pay off their loans within roughly 10 years. Because the effective lifespan of many mortgages is closer to one decade than three decades, the 10-year Treasury yield has become a useful benchmark for anticipating where mortgage rates may move.
Treasury bonds are widely viewed as one of the safest financial instruments in the world because they are backed by the “full faith and credit” of the United States government. This makes them a foundational benchmark for pricing many other types of debt, including mortgage-backed securities (MBS). Mortgage-backed securities are financial instruments created when banks bundle large numbers of mortgages together and sell them to investors. These securities compete directly with Treasury bonds for investor capital because both offer relatively stable, long-term income streams.
Despite their similarities, there is an important difference between Treasuries and mortgage-backed securities: risk. Treasury bonds are considered essentially risk-free in terms of repayment, while mortgage-backed securities carry several uncertainties. Borrowers might default on their loans, or they might repay them early through refinancing or home sales. Because of these additional risks, investors demand higher returns for holding mortgage-backed securities than they do for holding Treasuries. As a result, mortgage rates are typically higher than the yield on the 10-year Treasury.
Bond yields and interest rates generally move together. When bond yields rise, interest rates across the economy, including mortgage rates, tend to rise as well. Conversely, when yields fall, borrowing costs typically decline. This relationship can seem confusing because bond prices move in the opposite direction of yields. When investors rush to buy bonds, their prices increase and yields fall. When investors sell bonds, prices drop and yields rise.
As noted in the opening paragraph, economic expectations strongly influence these movements. When the outlook for the economy is weak or uncertain, investors often shift money from stocks into bonds because bonds are perceived as safer. Increased demand for bonds pushes their prices higher and yields lower, which in turn tends to bring mortgage rates down. When the economy appears strong and investors are optimistic about growth, they often favor stocks instead. This reduces demand for bonds, pushing yields, and mortgage rates, higher.
Although no one can accurately predict interest rates in the future with consistency, many observers track the 10-year Treasury yield to estimate where mortgage rates might be headed. A simple rule of thumb is to add roughly 1.7 percentage points (170 basis points) to the 10-year Treasury yield to approximate the average 30-year fixed mortgage rate. For example, if the 10-year yield is 4.0%, mortgage rates might hover around 5.7%. This difference, known as the “spread,” compensates investors for the additional risk associated with mortgage-backed securities. However, the spread is not constant. It can widen or narrow depending on market conditions.
At times of economic uncertainty or heightened risk, as we are in now, or increased early payoffs, investors demand a larger premium to hold mortgage-backed securities, which widens the spread. In recent years this spread has fluctuated significantly. During periods of financial stress, mortgage rates have risen much faster than Treasury yields because investors demanded greater compensation for risk. When markets stabilize, the spread typically narrows again.
Economic data releases also play a major role in moving mortgage rates because they influence bond markets, and two reports are particularly influential. The first is the monthly employment report from the U.S. Bureau of Labor Statistics, often called the “jobs report.” Although it was delayed due to the government shutdown, it measures non-farm payroll employment, unemployment rates, and wage growth. Because employment trends are closely tied to economic growth and inflation, the report can move financial markets significantly. If job growth is stronger than expected and unemployment declines, investors may anticipate higher inflation and stronger economic activity. This typically pushes bond yields, and mortgage rates, higher. Conversely, weaker job growth can signal a slowing economy, prompting investors to buy bonds and driving rates down.
The second major report is the Consumer Price Index (CPI), which measures inflation but also went through a span of being delayed. Inflation is one of the most important forces affecting interest rates because lenders and investors demand higher returns when inflation erodes the purchasing power of future payments. When inflation fears rise, interest rates usually climb. When inflation appears contained, rates often fall.
Actions by the Federal Reserve, such as changing the federal funds rate or releasing policy guidance, can influence investor expectations about inflation and economic growth. In addition, the Fed has directly affected mortgage markets through large-scale purchases of mortgage-backed securities. During periods of quantitative easing (QE), the Fed bought large amounts of these securities, increasing demand and pushing their prices higher. Because higher bond prices correspond with lower yields, these purchases helped drive mortgage rates to historically low levels. More recently, the Fed has shifted toward quantitative tightening (QT), reducing its holdings of mortgage-backed securities. As supply rises and demand falls, yields increase and mortgage rates tend to climb.
Supply and demand dynamics within the mortgage market can also influence rates. If mortgage lending surges and large numbers of new loans are packaged into securities, the increased supply of mortgage-backed securities may push prices down unless investor demand keeps pace.
The mortgage rate an individual borrower receives depends not only on market conditions but also on personal financial characteristics, as well as items such as loan size, loan type, or discount points. Advertised mortgage rates often assume an ideal borrower: someone with excellent credit, a substantial down payment, and a single-family primary residence. Borrowers with lower credit scores, smaller down payments, or riskier property types, such as investment properties or multi-unit homes, usually pay higher rates. Credit scores are particularly important; borrowers with very strong credit profiles typically qualify for the most favorable pricing.
Many in the financial press lump “mortgage rates” together, but STRATMOR clients should know that they are shaped by a complex interaction of financial markets, economic data, government policy, and borrower characteristics. While the 10-year Treasury yield offers a useful starting point for understanding rate movements, the full picture involves many interconnected forces that collectively determine the cost of borrowing for homeowners.
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