What moves mortgage rates: the 10-year Treasury and mortgage bonds

Mortgage rates are set mostly by investors in the bond market, not directly by the Federal Reserve. Most home loans are pooled into mortgage-backed securities and sold to investors, and the return those investors demand drives the rates lenders can offer. That return tends to move with the yield on the 10-year Treasury note, plus a gap, called the spread, that pays investors for the extra risks a mortgage carries. On top of the market, your own rate depends on your credit, your down payment, the loan type and the term.

So when you hear that rates moved today, the bond market moved first. Here is how the pieces fit.

From your loan to a bond

After closing, most home loans do not stay with the lender that made them. Similar loans are pooled together, and the pool backs a mortgage-backed security, or MBS. Investors who buy the security receive their share (opens in a new tab) of the principal and interest that borrowers pay each month.

Pooling spreads one big risk across many loans: the risk that borrowers pay early. People sell homes and refinance, and every early payoff hands the investor’s money back sooner than planned, often when rates have fallen and reinvesting pays less. Investors want to be paid for that uncertainty.

Lenders price the loans they make today by what investors will pay for mortgage-backed securities, and those prices follow Treasuries (opens in a new tab). When MBS prices rise, the rates lenders can offer usually fall; when MBS prices fall, rates usually rise. Prices and rates move in opposite directions.

Why everyone watches the 10-year Treasury

The 10-year Treasury yield is the rate the U.S. government pays to borrow for ten years, and the Treasury publishes the full set of daily yields (opens in a new tab). It is the benchmark most people watch for mortgages, for a practical reason: although a mortgage can run for thirty years, most are paid off or refinanced long before the last payment, so investors compare mortgage bonds with Treasury notes of a similar life.

Researchers at the Federal Reserve Bank of Atlanta (opens in a new tab) found that, over two decades, mortgage rates tracked the 10-year Treasury more closely than the federal funds rate the Fed sets.

The spread: why mortgage rates sit above Treasury yields

A Treasury note is backed by the federal government and pays on a fixed schedule. A mortgage bond pays on an uncertain schedule, because borrowers can pay early, and it has to cover the cost of servicing the loans. The spread between the two pays for those differences. It widens when markets are nervous or when big buyers of mortgage bonds step back, and narrows when demand is strong. That is why mortgage rates and the 10-year yield usually move together, but not always by the same amount.

What news moves rates

Bond investors react to anything that changes their view of inflation and growth:

• Inflation reports. Faster price growth erodes what a fixed payment is worth, so investors demand higher yields, and rates tend to rise. Slower inflation tends to do the opposite.
• Jobs and growth data. A strong economy usually pushes yields up; signs of weakness usually pull them down.
• The Federal Reserve. Not just its decisions, but what it signals about the path ahead. I cover this in what the Fed does, and does not do, to mortgage rates.
• Supply and demand for bonds. Large government borrowing, or a big buyer leaving the mortgage bond market, can lift yields or widen the spread.

Lenders can reprice during the day when the bond market moves sharply, which is why a quote is tied to a time and a lock.

Weekly averages and the quote you get

You will often see a weekly national average in the news. The most widely quoted comes from Freddie Mac’s Primary Mortgage Market Survey (opens in a new tab), published on Thursdays. Since late 2022, Freddie Mac explains (opens in a new tab), it has been built from loan applications that lenders submit to Freddie Mac, for a set borrower profile. It is a useful way to see the trend, but it is an average for that profile, not a quote. Your own rate depends on your file and the day you lock.

What you control

The market sets the starting point. The CFPB explains (opens in a new tab) that your credit score, your down payment, the loan type and the loan term all affect the rate you are offered. Improving your credit, putting more down and comparing loan types are the levers in your hands.

Frequently asked questions

Does the Fed set mortgage rates?

No. The Fed sets a target for an overnight rate between banks. Mortgage rates follow the bond market, which reacts to what investors expect the Fed and inflation to do over years.

Why can mortgage rates rise on the same day the Fed cuts?

Because the bond market had already expected the cut, and it reacts to what the Fed says about the future. If the outlook sounds less friendly than investors hoped, yields and mortgage rates can rise.

Should I wait for rates to drop?

Nobody can reliably predict rates. A better question is what payment you can comfortably afford today, and whether the home works at that payment. Our guide Buy Now or Wait: The Honest Math walks through that arithmetic.