Why Treasury Yields Have Fallen Since October, and What It Means for Mortgage Rates

The short version: The 10-year Treasury yield peaked near 5.3% (about 5.28%) on October 5 and now sits around 4.85%, a drop of roughly half a percentage point in a month. About 0.15% of that came in just two days, Wednesday and Thursday of this week. Average 30-year fixed rates are now near 7.17% (Mortgage News Daily), and most lenders are quoting par rates between 7% and 7.5%.

Where rates stand today

• 10-year Treasury: about 4.85%, down from about 5.3% on October 5
• 30-year fixed average: about 7.17% (Mortgage News Daily)
• Typical lender par rates: 7% to 7.5%, depending on borrower profile and pricing

A useful rule of thumb is that a prime borrower’s 30-year mortgage rate tends to run about 2 to 2.25 percentage points above the 10-year Treasury yield. With the 10-year near 4.86%, that math lands right around today’s 7.1% to 7.2% averages. Mortgage rates move with Treasury yields, not directly with the Fed’s policy rate.

The puzzle

The Federal Reserve has stayed hawkish, focused on fighting inflation and keeping the fed funds rate high. The Iran conflict is still ongoing. Yet yields started falling well before this week’s election. Nothing in the Fed’s stance explains that, so something else has been pulling yields lower. No one can say for certain what it was, but there are several plausible explanations.

Theory 1: A yield too good to pass up

At 5.3%, the 10-year Treasury was paying a very high return. With inflation running in the high 2s to mid 3s depending on the metric, a 5%+ yield is a real return of roughly 2% above inflation, essentially guaranteed. Large investors may simply have decided that was the moment to buy Treasuries and mortgage-backed securities. When that much money buys bonds, prices rise and yields fall, and mortgage rates follow.

Theory 2: Big money may know something we don’t

Large institutional traders have resources, research and information that most of us don’t. It is reasonable to ask whether they were positioning for something specific, such as a resolution to the Iran conflict.

The logic runs like this. Energy costs have been the main driver of inflation this year, with most other categories behaving well. If the conflict ends and global oil supply normalizes, oil futures fall and inflation expectations fall with them. An investor who expected that outcome would see a 5.3% Treasury yield as a bargain, because yields would likely drift back toward the low 4s over the following months. This is a theory about positioning, not evidence of anything improper. We can’t see their reasoning, only the effect on yields.

Theory 3: A flight to safety around the election

The sharper move this week, about 0.15% across Wednesday and Thursday, may reflect election uncertainty. When uncertainty rises, money tends to move into safe assets. An investor who normally holds 10% of a portfolio in safe assets might raise that to 12% or 15% for a while. That extra demand for Treasuries pushes yields down.

The jobs report didn’t push rates back up

Today’s jobs report was strong. Unemployment fell, nonfarm payrolls came in well above expectations, and prior months were revised upward. Most of the new jobs were in the private sector, which is a healthy sign. Normally, good economic news is bad news for rates, because a strong economy can keep inflation and yields elevated. Yields instead held roughly steady near 4.86%, which suggests that whatever is pulling yields down is carrying real weight.

Looking ahead: the next two months

With the election behind us, markets may be relieved simply to have the uncertainty over. Many expect divided government and gridlock, with budget fights and vetoes. For markets, gridlock can be a positive, since it reduces the odds of sudden policy swings. Investors and businesses may take comfort in not expecting wild changes in either direction over the next couple of years.

My own view for the period leading into the new year is that the Iran situation settles, inflation eases modestly, and mortgage rates improve by roughly another quarter point. In that scenario, a prime borrower’s conventional par rate with no fees would be around 6.5%, with other borrowers around 7% or a bit above. Any improvement could come quickly at first and then continue more slowly. This is a scenario, not a guarantee. Geopolitical developments, inflation data and Fed commentary can all change the picture quickly.

What this means for buyers and homeowners

• Buyers: Rates are lower than a month ago but still elevated. If you find the right home, it makes sense to run numbers at today’s rates and at a rate a quarter point lower to see how much the payment changes.
• Homeowners considering a refinance: Track the 10-year Treasury. If yields keep falling, refinance math may start to work for more people.
• Real estate professionals: When clients ask why rates moved, the honest answer is that yields fell on investor demand and uncertainty, not because of any Fed action.

Charlie Braden is a Texas mortgage broker and the only TREC-approved instructor in Texas teaching continuing education on how mortgage rates work and how markets affect mortgages.