Mortgage Rates and Treasury Bonds

How are mortgage rates related to the 30-year treasury and 10-year treasury?

4 Answers

Yields on the 30-year and 10 year treasury bonds are used to set long-term residential mortgage interest rates – those with 30 or 15 year terms (now you know why those are the standard term lengths, too). Mortgages with shorter initial terms, like adjustable rate mortgages (ARMs) or hybrid mortgages are usually tied to shorter term securities. It is important to understand that bond yields and interest rates have an inverse relationship: when bond yields drop, interest rates on bonds rise. However, bond yields and interest rates have a direct relationship, meaning that when yields drop, interest rates drop too.

Interest rates on U.S. Treasury bonds and thus residential mortgage interest rates are influenced by many, many different economic variables:

Gross Domestic Product (GDP):  Gross domestic product is the output of goods and services produced by labor and property located in the United States. A larger than expected increase in GDP or an increasing trend is considered inflationary. When inflation occurs, the cost of goods spirals out of reach of consumers. Inflationary trends may cause the Chairman of Federal Reserve Board (The “Fed” sets interest rates on bank-to-bank overnight loans – basically, loans from the federal government to banks) to raise interest rates to stop inflation.

Consumer Price Index (CPI): The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a fixed market basket of consumer goods and services. The CPI is considered the most important measure of inflation, and higher than expected CPI or an upward trend in the CPI is considered inflationary. The Fed may raise interest rates, and bond yields will fall, meaning mortgage interest rates might fall, too.

Other economic indicators that influence interest rates are the producer price index, which measures the average change over time in the selling prices received by domestic producers of goods and services; payroll employment statistics, which provide employment, hours and earnings estimates based on payroll records of businesses; and the unemployment rate, which shows how many people are not employed and not looking for employment. Like the GDP and CPI, increases in these indicators are considered inflationary, causing interest rates to rise. Another economic indicator considered to influence mortgage interest rates is consumer expectation. For reasons that are too complicated to go into here, if consumers expect mortgage rates are going to drop, they usually eventually will. Other economic indicators that people consider important, like housing starts and consumer credit are not thought to have any effect on interest rates.

They are not related. Mortgage rates are related directly to Mortgage Backed Securities (Mortgage Bonds). The 10 Year Note tends to trend in the same direction as Mortgage Bonds so people think that mortgage rates are tied to the 10 year treasury bond. If you work in the Mortgage Industry, check out The Mortgage Market Guide and you'll learn all about Mortgage Backed Securities.

The 10 Year Treasury does have its place in the mortgage world. After loans are closed, they are pooled by Fannie and Freddie and turned into Mortgage Bonds. Lenders will use the 10 year as a safety net while they are in the process of selling their loans. Its called a hedge and it protects lenders from getting burned when rates go down before they can sell their loans.

The 30 year Treasury and the 10 years treasury are only similar (to Mortgage Backed Securities) in that they are long term fixed rate securities. In this case backed by the treasury, whereas mortgage Backed Securities are, well, backed by mortgages.

They both work in similar ways as far as value is concerned. Long term fixed rates are good when we are in a recession or slow down, because the rate is fixed and the value or yield goes up or down depending on the economy.

For example if the 30 year treasury is at 6.3% with a .450 yield today, but inflation goes out of control, then the value for this investor would be to sell (at a discount) and put their money into stocks positioned to profit from the inflation. So you would expect the price (VALUE) of the same treasury to be less on the day of sale. The main thing to note is that although these treasuries will sometimes track in similar ways to the MBS (mortgage Backed Securities) they are not a good indicator of mortgage rates. The reason is that they can and do move in the opposite direction of MBS's.

So the answer is none. There is no direct correlation between the 10 yr treasury and the 30 year treasury and mortgage rates of any kind. There is no loan that uses the 10yr or 30yr as an index (Like the 10/1 treasury ARM which is based on the 1 yr as an index.)

If you want to track the MBS you will have to get it on a delay or pay money for the updates. However, this will usually only buy you 20 to 30 minutes before your lender re-prices, but the best value is if the analsys recommends float rather than lock and thereby getting the best rate possible.

I hope that helps!

Good points in this thread. To see charts and a discussion on how Treasuries affect mortgage rates, follow this link: