There’s been a lot of talk about the Fed lately, especially in the courts as battle lines are drawn between President Trump and Federal Reserve Governor Lisa Cook in the courts. While that is far over my ability to make any meaningful comments about, what I can tell is this, it’s all about the spread. I’m not talking shmears on your bagel, but rather the spread between the 10-year Treasury yield and mortgage backed securities (MBS). The 10-year treasury is important as that is what mortgage rates are most closely tied to, as opposed to the often discussed Federal Funds Rate. Put simply, the 10-year Treasury yield reflects broader economic outlooks and contains information about market expectations for future growth and inflation. Historically, the spread between the 10-year and mortgage rates has been between 1.7 and 2.0 points. Today, that spread is closer to 2.4 points, down from 3.1 points reached in early 2023.
So why does this matter? When you hear talk about the Fed “reducing rates,” it does not automatically mean mortgage rates will be coming down. Instead, it’s a broader indicator (so long as the Fed remains politically independent) of economic sentiment and indicators. Falling Fed rates may mean economic growth is slowing or there is trouble ahead. Alternatively, stability and reduced volatility would likely lead to a narrowing spread between the 10-year and MBS thus leading to lower mortgage rates offered by lenders. What we should hope for is stability in the financial markets and not worry so much about the Fed.
What does this mean for rates? According to the Mortgage Bankers Association, the “rate forecast leads to a 30-year mortgage rate expectation of 6.7% percent by the end of year and declining to 6.5% percent by the end of 2026.” With threats of rising inflation, mixed jobs reports, and all sorts of political distractions (tariffs, firings, and divided party lines), lower mortgage rates are not the surefire magic bullet coming to boost the real estate market. Not yet anyway.
For more information, take a look at this article in Kiplinger – https://www.kiplinger.com/real-estate/buying-a-home/how-does-the-10-year-treasury-yield-affect-mortgage-rates
