The bond market is where it all begins.
Mortgage rates, like other long-term loans, tend to follow the rate or yield on the 10-year Treasury bond. This bond is considered the safest bet for lenders since it is backed by the U.S. government. Lenders usually start with this rate, also known as the risk-free rate, and then increase it to account for the higher risk of not being repaid by borrowers, like home buyers.
The yield on the 10-year Treasury note recently reached its highest point since 2007, reflecting the Federal Reserve’s efforts to control inflation by raising borrowing costs. The Federal Reserve determines the short-term interest rates, and expectations for future interest rates have a significant impact on yields for longer-term bonds.
When inflation is high, the Federal Reserve raises short-term rates to slow down the economy and reduce price pressure. However, higher interest rates make it more expensive for banks to borrow, causing them to increase rates on consumer loans, including mortgages, as compensation. This trend has been ongoing for over a year, with the Federal Reserve’s rate climbing above 5 percent, and mortgage rates following suit.
A strong economy also influences mortgage rates in several ways. A robust job market increases households’ disposable income, leading to higher demand for mortgages and pushing rates up.
