Treasury Yields Down; Mortgage Rates Up; Why?

“Interest rates” went down again today, but “mortgage rates” went up.

I have blogged about this before but am hitting it again because it is so interesting and because it confuses borrowers and agents alike.

When I refer to “interest rates” in my subject line, I am referring to the 10-Year Treasury Yield, as it fell today – so I thought mortgage rates would too. But, they did not.

The problem is that many of our borrowers watch the 10-Year Yield too and they will come to us asking about today’s lower rates – forcing us to try to explain why rates are not actually lower.

What Are “Interest Rates?”

While much of the world looks to the U.S. 10-Year Yields as the defining interest rate, there are actually many “interest rates” that investors and analysts track – including the 10-Year Treasury Yield, The Prime Rate, The Fed Funds Rate, Mortgage-Backed Security (MBS) Yields, and Average Mortgage Rates (different from MBS yields). There are also all of the major interest rate indices, including LIBOR, HIBOR, and MTA, that lenders use for adjustable-rate mortgages.

This blog - What Are "Interest Rates?" Do They All Move In Unison? – digs into all of this in much more detail.

Why Did Mortgage Rates Go Up Today When the 10-Year Fell?

10-Year Yields fell because the world’s a scary place right now.

And – when the world is scared, investors don’t clamor into mortgages; they clamor into Treasuries. This is because Treasuries are the equivalent of U.S. dollars and they are considered the most liquid instruments on the planet, universally accepted by anyone and everyone across the planet.

NOTE: This is why “de-dollarization” fears are overblown. The demand for dollars/Treasuries in recessionary or volatile times is higher than ever, and the overall dollar market is simply far too huge to be replaced anytime soon.

So sometimes, the relative demand for Treasuries exceeds the relative demand for mortgages, and Treasury yields fall when mortgage rates don’t.

This Is Why Mortgage Rates Are Higher Than Treasury Yields Too

Mortgage-Backed Securities (MBS) are excellent investments, as their yields are 2% to 3% higher than 10-Year Treasuries and they are effectively backed by the U.S. government, as it effectively backs Fannie and Freddie.

So, why don’t investors clamor into MBS instead of Treasuries – when they’re so safe and they offer higher yields?

They don’t because MBS are much less liquid; they are not considered “pristine collateral;” and they come with an early payoff risk (borrowers refi when rates drop).

I blogged about this here: 10-Year Treasury Yields Vs. Mortgage Rates (Great Info & Good News!)

Rates Won’t Stay Lower But They Will Continue to Trend Lower

Rates have moved sharply lower over the last week, but will they stay low? No. They never move in a straight line.

BUT, I do expect rates to continue to trend lower, despite the ups and downs, because of all the weaknesses in the economy overall.

Read more or subscribe to our blog here.