How bonds affect mortgage rates
Quick insights
- Mortgage rates are influenced by many market and personal factors, including developments in the bond market, where debt securities are bought and sold.
- There is some relationship between bond rates and mortgage rates; when prices for bonds rise and their rates fall, lower interest rates may be seen in the mortgage marketplace.
- Lenders often reference 10-year U.S. Treasury bonds when setting mortgage rates for 30-year mortgages because of similarities in their economic activity.
Those who are currently in the process of exploring homebuying options likely understand the value of getting a low interest rate on their mortgage. However, it may be unclear what factors contribute to this rate, including the complex relationship between mortgages and the bond market, where debt securities are bought and sold. In this article, we’ll dig into the many factors influencing mortgage rates, including a careful dissection of the way the bond market can affect mortgage rates.
Mortgage rates and treasury bonds
Treasury bonds and mortgage interest rates are influenced by similar economic factors. Changes in one can often signal changes in the other. More specifically:
- Bonds as a benchmark: Mortgage lenders sometimes use 10-year U.S. Treasury bonds as a benchmark for pricing their rates. This is because the return paid to investors of these bonds mimics the activity of a typical 30-year mortgage. While a 30-year mortgage seems much longer than a 10-year bond, 10-year bonds act as a useful gauge to lenders who anticipate homeowners refinancing or selling their home on roughly the same timeline.
- Economic fluctuation: Treasury yields and mortgage rates can both be affected by Federal Reserve policies and economic indicators like inflation and employment data. Positive economic trends can create higher bond yields and interest rates, while negative data might have the opposite effect. In general, mortgage interest rates tend to rise when bond yields rise, and vice versa.
Buying a home based on treasury bond yields
Because of the ways mortgage rates and bond yields are connected, those looking to purchase a home or refinance may find it useful to monitor trends in bond rates. When the interest rates (and yields) for bonds are lower, there may be mirror effects in the mortgage marketplace with regards to current interest rates.
Treasury bonds, particularly the 10-year treasury note, primarily affect fixed-rate mortgages. That’s because lenders might use the yield on that note as a benchmark for setting rates on 30-year and 15-year fixed mortgages. Because of the timeline, 15-year fixed-rate mortgages may be more sensitive to the yields of short term treasury bonds.
The U.S. Treasury website, financial news platforms, mortgage rate estimators and affordability calculators can help you understand the current market conditions and time your purchase.
The bond market
The bond market is a financial marketplace where participants can buy and sell debt securities, typically government and corporate bonds. Bonds are a type of IOU repaid with interest (also known as “coupon payments” or a “coupon rate”) often issued by the government or a business looking to raise capital. From an investor’s perspective, bonds are often understood as low-risk, long-term loans.
This type of security tends to be more in demand when riskier investments (such as positions in the stock market) are less attractive due to market volatility. Because of their stable returns, bonds tend to appeal to the same kind of risk-averse investors as those pursuing mortgage-backed securities, one of many points of connection between the two.
How bond rates are determined
One of the most popular bonds is a U.S. Treasury bond, which is a type of loan a given to the government, repaid back by the government with interest. Rates for Treasury bonds are determined at auction, and therefore by the market itself—a reflection of investors’ current willingness to hold onto the government’s debt in exchange for interest.
- Why yields rise: Times of market volatility may spur more investors to consider bonds, increasing demand, which can drive prices higher and yields lower.
- Why prices fall: When the market is perceived to be more stable, investors may opt for higher risk, higher reward options. Decreased demand can cause bond prices to fall and yields to rise to attract investors.
Bear in mind, these are generalizations about the ways market sentiments can influence personal investing decisions. Other factors may also play a role in the bond market, such as inflation or updates to government monetary policy.
In conclusion
While activity in the bond market is not the only factor that influences mortgage rates, it can be a useful data point to review when planning your own home purchase. For personalized information regarding mortgages at Chase, consider contacting a Home Lending Advisor who can assist you.
