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How do Moves in the Stock or Bond Market Impact Mortgage Rates? (Part 2)

Posted by on Monday, March 20th, 2017 at 9:01am.

Written by Robert H. Ruth

The other week in Part 1, I discussed the fact that the stock and bond markets are always moving, and these ebbs and flows reflect investor’s tolerance for risk.

  • When stocks are moving higher, people feel optimistic that stocks are the best place to put their money, where they will get the highest return, and that confidence in the market outweighs the potential risks of investing.
  • When investors are concerned about the direction of the market, or there is uncertainty about the state of the economy, people look to put their money in what they perceive to be a safe haven, and they move their money into bonds.

And one of the safest havens for investors are US Treasury Securities, and the most important of these as it relates to mortgage interest rates is the yield on the 10 Year Treasury Note

So when money goes into stocks, bonds are less attractive and their price goes down. Because the price of bonds is dropping investors have to be paid more to own them, and thus the bond yield goes up.

When money goes out of stocks, bonds are more attractive and their price goes up. Because the price of bonds is increasing, their yield paid to investors who own bonds goes down.

And so if you want to get a good idea of the direction of mortgage interest rates it is important to really watch the day to day movement in the yield of the 10 Yr. Treasury Note. When the 10 Yr. Treasury yield goes up, rates are headed higher, and when the 10 Yr. Treasury yield goes down, rates are heading lower.

Why is the 10 Yr. Treasury Note So Important for Mortgage Rates?

The reason the movement of the 10 Yr. Treasury Note is a good indicator for rate has to do with the speed of pre-payments on mortgages.  That is because most standard 30 Yr. Fixed Rate loans have historically been paid off by a refinance or sale of a home within 10 years. Also, 10 Yr. Treasury Notes and 30 Yr. Fixed Rate Mortgages are similar types of investments, so like-minded investors would be looking at both at the same time.

This is especially important right now (March 12, 2017), because the Federal Reserve has used bond buying to stimulate the economy after the recession which began in 2008. The unusually low interest rates we have seen in the past few years were the result of the Fed intervening in the markets to keep them liquid in the wake of the recession. International investors have also been heavy buyers of US Treasury Securities because they have seen the US Treasuries as a very safe place to invest. Now, with the dramatic move in the stock market since the election of President Trump, investors have been moving their money out of safer havens and into equities and the move out of bonds has led to an  increase in bond yields, driving mortgage rates significantly higher as the chart below shows:


10 Yr. Treasury Note Yield

30 Yr. Fixed Rate Mortgage










So where are mortgage rates headed?

Now, this week, with the economy expanding, investor confidence increasing, unemployment dropping, and the view that the US economy is functioning normally again, there is widespread belief that the Federal Reserve will raise short term interest rates. Since the economy does not seem to need the assistance of the Fed much longer it has become time to start removing the stimulus measures they used to help the economy. It is sort of like a patient who is sick being gradually taken off the medicine they needed to stay alive … you don’t do it all at once, but gradually reduce the amount needed and the required dosage so the patient can, over a period of time, return to a normal life.

If the Fed does raise rates, it will be interesting to see what the impact of that will be on mortgage rates.  It would be absolutely foolish for me to predict where interest rates are heading, so I won’t do that.  I CAN guarantee you one thing about interest rates : they will fluctuate…often…and unpredictably at times.  So keep an eye on the 10 Yr. Treasury Yield and you will have a pretty good insight into where mortgage rates could be heading, and if you watch the stock market direction and the 10 Yr. yield you’ll be a much better informed mortgage buyer.

Robert H. Ruth
Senior Mortgage Banker
Direct: 401.789.4441
Mobile: 401.743.4364
NMLS ID: 513243

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