Mortgage Rates, the Fed and the 10 Yr Treasury


There is a lot of news lately about the Fed raising rates, but what does that mean exactly? Are they raising mortgage rates?? Investment rates??? I’ll do my best to keep this brief and not too technical and this is how I see it-

In a nutshell, when the Fed raises rates, everything is really affected because what they are raising is the Fed Funds Rate. This is a key component for banks investing. The Fed Funds rate is the bank’s overnight interest rate at which they lend or borrower money to/from each other or the Federal Reserve. It has consistently stayed between 0% and .25% since 2008 but has been as high as 20% in the early 80’s. As a result, mortgage rates have been very low for the last 6 years, but so have CD rates, money market rates, and other investing rates.

The Fed Funds rate immediately influences the Prime rate. If the Fed Funds rate goes up, then the prime rate will do the same. If you have a home equity line of credit (HELOC) with a prime +1 interest rate and the Fed increases their rate by .5, then your HELOC rate just went up by a half of a percent.

One index that I like to watch closely is the 10 year treasury (TNX). Mortgage rates have historically trended with the 10 year treasury, so this index gives me an idea if rates will be rising or falling throughout the day. If the yields are going up quickly, then it’s likely we will get worsening pricing on our mortgage rate sheet. The graphs on the TNX reflect real time and can be helpful when deciding when to lock a rate. Oct 14th marked a 6 month low at 1.98 and today we are opening at a 90+ day high at 2.34. There are lots of variables in this dramatic incline, but it’s probably related to the certainty around the Fed raising rates soon. If you take a look at the last 7 days, then you can see that rates are obviously trending upwards. contributor