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Mortgage rates typically rise and fall along with 10-year Treasury yield, as both are influenced by investor activity in the bond market.
Bing Guan / Bloomberg
Mortgage rates have risen this week from their historic low. Buyers and homeowners looking to refinance shouldn’t expect them to fall again.
Bond yields, which have been steadily increasing since mid-August in the hope of further stimulus and optimism that the economy will recover as soon as the vaccine is distributed, have increased rapidly in the new year, with the 10-year Treasury reference yield rising. 22 basis points (hundredth of a percentage point) to close at 1.15% this week.
This could be an indicator that ultra-low mortgage rates – which generally move with 10-year Treasury yield – have bottomed out. Mortgage rates rose this week to 2.79% from 2.65% the week before,
Freddie Mac
reported Thursday. “As Treasury yields have increased, he is pushing mortgage rates to go up,” said Sam Khater, chief economist at Freddie Mac.
Mortgage rates typically rise and fall along with 10-year Treasury yield, as both are influenced by investor activity in the bond market. Both mortgage rates and Treasury yields dropped to new lows or near historic lows during the pandemic, with the 30-year fixed mortgage rate averaging around 2.83% in the past six months, according to data from the Freddie Mac, and the 10-year Treasury average yield of 0.78%, according to data from the Federal Reserve System Board of Governors.
Although both fell during the pandemic, the spread between 10-year Treasury yields and 30-year fixed mortgage rates widened beyond its normal range, as an expanding refinancing market overwhelmed creditors, mortgage rates fell less than yields. As a result, mortgage rates continued to fall even after yields began to rise in August.
If Treasury yields continue to rise, mortgage rates are likely to have reached historic lows. “The absolute drop in mortgage rates is likely to end,” said Lawrence Yun, chief economist at the National Association of Realtors, in an email to Barron’s. “Expect a small upward push in mortgage rates in the coming months.
If spreads between 10-year rates and mortgage rates remain in their current range, the mortgage rate is likely to increase to approximately 3.5% by the end of 2021, said Joel Kan, associate vice president for economic and Mortgage Bankers Association, in an interview with Barron’s. While an increase in the mortgage rate is likely to reduce the demand for refinancing, Kan says he does not expect the rate hike to affect the home buying market.
While rising Treasury yields put more pressure on mortgage rates, the two are not guaranteed to move together, wrote Keith Gumbinger, vice president of the mortgage website HSH.com, in an email to Barron’s. “Mortgage lenders are full of profits and therefore can absorb part of the increase for a while to keep the business flowing.” Purchases of mortgage-backed securities by the Federal Reserve, which help maintain market liquidity in times of crisis, also play a role, he said.
Even if mortgage rates rise this year, there is still a long way to go before they reach historic highs. “While mortgage rates are expected to rise modestly in 2021, they will remain unmistakably low, supporting residential buyer demand and leading to continued refinancing activity,” wrote Freddie Mac’s Khater in a statement. Freddie Mac expects the 30-year fixed mortgage rate to average 2.9% in 2021 and 3.2% in 2022, according to the organization’s quarterly forecast.
The average 30-year fixed mortgage rate since 1971 is 7.90%, according to data from Freddie Mac. In the past decade, the average rate has been 3.93%. The highest average rate recorded by Freddie Mac was 18.63% in early October 1981.
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