On November 21, the yield on a 10 year Treasury note hit a two month high, thanks to positive reports about U.S. unemployment rates and speculation that the Federal Reserve may soon reduce bond purchases. This landmark is considerably higher than the 10 year note yield on June 1, 2012, when it hit its lowest mark in two centuries. This is more important to those in the mortgage industry or those looking for a home more than you may realize.
The record low yield of 1.442% in 2012 drove mortgage rates to hit record lows, just as the recent highs had raised mortgage interest rates. It turns out that Treasury note yields are directly related to fixed-rate mortgage interest rates. But how?
Investors seeking a fixed return have several options. Yes, they can buy Treasury notes backed by the U.S. government. But they can also invest in CDs or money market funds. These offer more risk, but also the opportunity for more reward. If they are willing to take an even greater risk for the possibility of even higher returns, they can buy mortgage-backed securities.
Since they compete with Treasury notes for the investor’s dollar, it is vital that these mortgage-backed securities keep their returns above the returns investors get with 10 year Treasury notes. This is the only way they can continue to attract the investors. Of course, the only way they can pay higher returns is by bringing in more money. This means higher interest rates to the borrower. It is important to know that Treasury yields only affect fixed-rated mortgages.
The yield on 10 year Treasury notes is explicitly tied to the interest rate on a 15-year conventional loan. At the same time, 30-year fixed-rate loans are tied to 30-year Treasury bonds. In short, because there is direct competition between Treasury notes and mortgages, their rates rise and fall similarly.
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