How does a 10-year treasury affect the mortgage rate?

Treasury bonds and mortgage interest rates tend to move together, therefore they should be understood relative to one another. In this article, we will be introduced to how the 10-year treasury affects the mortgage rate.

How does the 10-year treasury work and affect the mortgage rate? 

Companies sell bonds and investors can become bondholders and get steady and safe returns, rather than invest their money in more volatile markets such as stocks, gold, and others. Treasury bonds are a safe and reliable investment for investors as it can be a guaranteed safe places to put ones money as it is secured by the government and therefore ensures investors a guaranteed rate of return. Simply put, when an investor invests in bonds, they are basically lending money through an intermediary whom is a company and purchasing bonds backed by the full faith of the US government. When investors buy treasury bonds, it means they are loaning money to the government, and in return, they get back a certain percentage of interest until the bond matures. Returns on bonds is often less than other investments, however unlike other investments that are risky and not guaranteed, investors can ensure a small, but reliable rate of return on their investment.

The U.S. Treasury Department issues three security products. These including issuance of bills, notes, and bonds. These treasury products are sold to pay the US debt. Notes are issued for terms of two, three, five, and ten years. The Treasury Department issues bonds for a term of 30 years, and bills are issued for a term of one year or less. However, people generally refer to all three of these treasury products as treasury bills, bonds, or treasury products. The Treasury Department sells all the products at an auction to pay the U.S. debt. The maturity time of treasury bonds differs and ranges from 10 to 30 years. Investors’ money is locked up for that specified amount of time. Once the bond matures, bondholders get repaid the face value and, meanwhile, earn the interest rate on their investment. To understand how the 10-year Treasury is related to the mortgage rate, here is an important term that you need to know: ‘yield’.

The U.S. bond yield means the price of bonds that the government pays on the bonds that they sell. Low yield means high demand, and the government can easily sell the bond to the investors. High yield means low demand, and the government faces trouble selling the bonds. When the yield is higher, the government raises the interest rate on bonds to entice investors.

The yield rate of a 10-year Treasury bond is beyond the investors’ expectation of the rate of return. it is often used as a sign of investor sentiment regarding bond investment; whether the investor has enough confidence to invest in the current economy or not. When yields are low, it means the stock market and economy are flowing and investors want a ‘low-risk’ investment vehicle. When yields are high, investors find it a great opportunity to invest as it will give a great return on investment.

Over the last 20 years, it has been seen that mortgage rates and yields rise and fall together. The same has been noticed for the unprecedented year 2020. With the outbreak of COVID-19, the treasury bond rate dropped to the lowest rate due to high demand as bondholders wanted the safety of their investment during the global health crisis. In times of great uncertainty, bonds offer investors a safe and reliable investment, albeit with a low rate of return. Other investments may offer high returns, however are not backed by the US government.

How do mortgage rates follow treasury yields?

 The mortgage rate and Treasury yields tend to move because investors compare returns on both investments. Certificates of deposit and money market funds offer slightly higher interest rates, but investors find them riskier as they are not guaranteed. Because of the short term, they are safer compared to any other non-government bonds.

Mortgage-backed securities backed by the value of the home loan, in turn, are riskier and offer a higher return. When treasury yields are high, investors invested in mortgage-backed securities want interest rates to be increased to compensate for the greater risk.

Investors invest in corporate bonds earn higher rates of return. The prices of corporate bonds impact mortgage rates as both of them compete for the same low-risk investors. The impact of treasury yield can be seen only on fixed-rate mortgages. The 10-year treasury note affects both a 15-year and a 30-year conventional mortgage.

Key Takeaway – Historically, the 10-year US Treasury has been affecting the mortgage rate, but it is not the only factor that influences the mortgage rate as it is generally believed. The mortgage rate and the treasury generally move together because the same low risk buyers are typically buying either loans or notes. The mortgage rate follows the change in the treasury to stay competitive in the eyes of investors.

How does a 10-year treasury affect the mortgage rate?

How does a 10-year treasury affect the mortgage rate?

Facebook
Twitter
LinkedIn
Pinterest

Leave a Reply

Your email address will not be published. Required fields are marked *

[quiz-new]