How Are Fed Moves and Mortgage Rates Connected?

Posted on 05/2/08 5:25 PM

You have probably noticed that while the Fed has continued to lower the federal funds rate, mortgage rates haven’t necessarily dropped. That’s largely because mortgage rates typically track the yield on the 10-year treasury note, not the Fed funds rate (the Fed-controlled interest rate that banks charge one another for overnight loans). As Christopher Thornberg of Beacon Economics says “When you think about a fixed-rate mortgage, you’re talking functionally about a 30-year bet of which the short-run costs [i.e. the overnight rate] of capital are but a minute part”. On average people pay off their mortgage every 10 years, as a result mortgages tends to have roughly the same [sensitivity to interest-rate changes] as a 10-year treasury.

More Details: check out this article to find out more about how 10-year treasury notes and 30-year fixed mortgages are connected, and where mortgage rates might be heading. If you still want to read on, take a look at this one too.