Mortgage rates rise as Treasury bond yields climb

Against a backdrop of persisting inflationary pressures, yields on longer-term bonds have been climbing, which experts say is likely to keep borrowing costs elevated — particularly for long-term fixed-rate loans such as mortgages.

The yield on the U.S. 30-year Treasury bond hit 5.323% on Tuesday, a 19-year high, before edging down to just below 5.3%. The 10-year Treasury yield — a key benchmark for fixed mortgage rates and other longer-term loans — is above 4.7%. That compares to below 4% before the start of the Iran War at the end of February.

“The higher bond yields on long-dated securities, like the 30-year Treasury, clearly indicate discomfort over persistently high inflation in the future,” said Lawrence Yun, chief economist for the National Association of Realtors. 

The annual rate of inflation was 3.4% in July as measured by the consumer price index, far above the Federal Reserve’s target of 2%. Before the war, in January, the annual inflation rate was 2.4%.

Since 15- and 30-year fixed-rate mortgages typically follow the lead of Treasury rates, higher yields have already been pushing up mortgage rates. The average rate for a 30-year, fixed-rate mortgage was 6.75% as of Tuesday, after finishing last week at 6.69%, according to Mortgage News Daily.

“The impact on mortgage rates is directly related to higher bond yields,” Yun said. “Independent of the Federal Reserve policy, higher inflation and higher overall long-term borrowing costs will mean higher mortgage rates.”

He said consumers should not expect any meaningful decline in mortgage rates.

Last week’s “favorable economic data provided only temporary relief,” said Jeff DerGurahian, LoanDepot’s chief investment officer and head economist. Higher energy prices stemming from the Iran conflict remain “an important part of the inflation picture,” he said.

“Longer-term bond investors may need more evidence that the post-pandemic inflation cycle is truly behind us and that the economy is returning to a slower-growth, slower-inflation environment before 10- and 30-year Treasury yields move meaningfully lower,” DerGurahian said.

In the meantime, there are ways to offset today’s higher rates, experts say.

“Some may want to consider shorter-term mortgage rates, like seven-year [adjustable-rate mortgages], which lock in fixed mortgage payments for the first seven years of the loan before readjusting,” Yun said. “These shorter-duration loans are ideal for those who are more certain they will move to another home within that seven-year timeframe.”