The Fed Raised Rates, but Bond Yields Set Your Mortgage Rate

The core story

The Fed doesn't set mortgage rates. The bond market does. That's the idea to build the posts around, and this month shows it clearly.

1. The 10-year Treasury yield was 4.97% on Sept 22. That's up 0.27 points in a month and 0.86 points from a year ago (Trading Economics).
2. It crossed 5% on Sept 14 for the first time since October 2023.
3. The Fed raised rates on Sept 16 by a quarter point, to 3.75% to 4.00%. The vote was 12-0. It was the Fed's first increase since July 2023 and the first move under Chair Kevin Warsh.
4. Most Fed officials expect one more hike this year. Warsh said inflation has been "too high ... for too long."
5. Yields fell after the hike instead of rising. Markets had already priced it in.
Headlines expecting the hike to push mortgage rates up got the timing wrong: the bond market moved first.

What it means for mortgages

Now A year ago
30-year fixed 6.95% 6.26%
15-year fixed 6.26% 5.41%

Source: Freddie Mac, week of Sept 17. The 30-year rose 0.19 points in one week, its third straight weekly increase. The next release is tomorrow, Sept 24, so date any rate you cite.

The spread. Mortgage rates usually run about 1.5 points above the 10-year Treasury. Right now the gap is about 1.95 points (firsttuesday Journal, Sept 18). Buyers are paying extra for lenders' uncertainty on top of higher yields. If that spread narrows, rates could ease even if the 10-year stays where it is.

Payment math (principal and interest only, 30-year, 20% down):

Home price At 6.26% At 6.95% Difference
$700K $3,452/mo $3,707/mo +$255/mo (~$3,060/yr)
$800K $3,945/mo $4,236/mo +$292/mo (~$3,500/yr)

Why yields are high
1. Inflation. Fed officials expect headline PCE inflation of 3.7% this year. Bond investors want a higher yield so inflation doesn't eat their return.
2. Oil and the Iran conflict. Yields have dipped on days when oil fell on hopes of a diplomatic solution.
3. Deficits and heavy Treasury borrowing. More supply of bonds pushes yields up.
4. Term premium. Investors want extra pay to lock money up for 10 to 30 years when the future feels uncertain. The yield curve shows it: 2-year at 4.76%, 10-year at 4.96%, 30-year at 5.29% (Sept 21).