Why are mortgage rates going up?

The rate you are quoted is not the Fed’s rate

The Federal Reserve sets a target for the federal funds rate, the overnight rate at which banks lend reserves to each other. A 30-year mortgage is a thirty-year loan. Nobody funds a thirty-year loan with overnight money, so the overnight rate is not what a mortgage is priced against.

What it is priced against is the yield on the 10-year Treasury note, plus a spread. The three figures below are the site’s stamped readings of each; the gap between the first two is the spread, and the third is the one the Fed actually controls.

Why the 10-year, and why it moves on its own

A ten-year yield is, roughly, the market’s guess at what short-term rates will average over the next ten years, plus a premium for locking money up that long. Both halves can move without the Fed doing anything.

If investors come to expect that inflation will stay higher for longer, they expect the Fed to keep short rates higher for longer, and the ten-year rises. If the Treasury has to sell more debt than buyers want at the current price, the price falls and the yield rises. If a Fed statement implies fewer cuts ahead than markets had priced, the yield rises even as the policy rate is cut that same afternoon. This last case is the one that produces the headline “Fed cuts rates, mortgage rates rise”, and it is not a contradiction. The cut moved the overnight rate; the guidance moved the ten-year expectation.

The spread: the part that is about mortgages specifically

A mortgage is riskier for the lender than a Treasury in two ways. The borrower may default, and the borrower may refinance the moment rates fall, handing the lender its money back exactly when it is least welcome. The spread between the mortgage rate and the ten-year covers both, plus the lender’s costs and profit.

The spread is not constant. It widens when the future is uncertain, because uncertainty makes the prepayment option more valuable to the borrower and more costly to the lender. It widens when the Fed is shrinking its holdings of mortgage-backed securities, which it does during quantitative tightening: the largest buyer in the market steps back, and the remaining buyers want a higher yield. And it narrows again when either condition reverses.

So “why are mortgage rates going up” usually has one of three honest answers, and sometimes all three at once: the ten-year rose because expectations for the Fed’s path rose; the ten-year rose because the government is borrowing more; or the spread widened because the Fed is stepping out of the mortgage market or investors are nervous.

What a Fed decision does and does not do

A cut in the target range lowers the rates that are contractually tied to short-term benchmarks: credit cards, home-equity lines, adjustable-rate mortgages at their reset date. It does not lower a 30-year fixed rate by any fixed amount, and can raise it. What lowers the 30-year fixed rate is a fall in the ten-year yield, and that requires the market to expect lower short rates for years, not one afternoon.

This is why the rate you can lock today often moved before the Fed met, not after. The meeting confirms or disappoints an expectation that was already priced.

How to read a mortgage-rate headline

• “Mortgage rates hit X percent.” Almost always Freddie Mac’s weekly survey average for a borrower with strong credit and a 20 percent down payment, before points. Your quote will differ.
• “Rates rose after the Fed cut.” Look at the ten-year that day. If it rose, the guidance moved expectations; the cut was already priced.
• “Rates are high because the Fed is high.” Half true. The Fed’s rate anchors expectations for short rates, but the ten-year and the spread do the rest, and each can move the other way.

The 30-year mortgage rate and the 10-year Treasury yield each have a data page with the figure, the chart, and the stamp.