When the 10-year treasury yield increases, mortgage rates increase. Several factors are causing the treasury yield to rise, including a resilient job market and consumers spending freely on things like Taylor Swift concerts and tickets to the Barbie movie.
The average 30-year mortgage rate hit 7.79% last week, its highest level in 23 years. Despite hopes that rates would come down once inflation started to cool, they have remained above 6% all year and above 7% since mid-August, spooking many would-be homebuyers.
The steep rise in the 10-year treasury yield is the main reason mortgage rates are approaching 8% and staying higher longer than expected. The things that are driving up treasury yields are driving up mortgage rates.
Treasury yields climbed to 5% this week. Although the 10-year treasury yield only stayed above 5% briefly and is now sitting in the high-4% range, it has risen sharply since the beginning of summer. Because it underpins most consumer borrowing costs, a high 10-year treasury yield equals high mortgage rates; typically, mortgage rates are roughly three percentage points higher than the treasury yield. 5% yield = 8% mortgage rates.
The 10-year treasury yield jumped as it became clear the overall economy is stronger than expected, and investors now expect it to remain resilient despite high interest rates for longer. Several economic indicators point to a still overheated U.S. economy that merits higher rates for longer:
- GDP grew 4.9% in the third quarter, which means the economy is doing very well. The economy surged in the third quarter as consumers spent money on things like Taylor Swift concerts, tickets to the Barbie movie and going out to eat. Overall GDP and consumer spending both grew at their fastest pace in nearly two years; for context, 2% to 3% is considered healthy GDP growth, so nearly 5% is very strong. Looking forward, GDP growth should slow in the fourth quarter as events such as worker strikes, wars and student loan repayments put a strain on the economy.
- Inflation is staying high. While inflation has come down significantly over the last year, it still stands at 3.7%, higher than the Fed’s 2% target. That’s a major reason why the Fed is expected to keep interest rates high into 2024–though they’re still not expected to raise rates next month.
- The labor market is strong. September’s jobs report showed unexpected resilience in the labor market, with the U.S. adding many more jobs than expected and the unemployment rate holding steady. Early indicators of October’s job market shows that it’s still strong.
Increased supply and slowing demand for government bonds is another factor pushing the 10-year treasury yield up. Because U.S. tax revenues fell unexpectedly this year, the treasury needed to borrow more money–and they borrowed money using longterm debt (10-year treasuries). That, along with ever-growing government spending, means more treasury supply. Meanwhile, demand for treasuries is lower because investors–including China–are pulling back amid uncertainty around the economy and the bond markets. That results in lower prices, which means higher yields (or interest rates).
The irony is that mortgage rates are likely to remain elevated as long as the economy stays strong. A strong economy is good news for workers hoping to keep jobs, find jobs and earn more money, but it can be problematic for people seeking mortgages or with credit card debt because it keeps rates high.
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