Interest rates rise with inflation

Mortgage Interest Rates Today – Have We Turned a Corner?

Casey Fleming

Well, the wild ride continues.  As I’ve written before, the three most important factors in interest rates are inflation, inflation and inflation.  How is this impacting mortgage interest rates today?

Closer Look:  Inflation and Mortgage Rates What We Know About the Relationship (

Inflation, Inflation, Inflation

After running under 2% annually for years, inflation took off in 2021 and has held stubbornly high.  Have we turned a corner?  Take a look at the chart below.  You can see the initial runup, then a leveling off, and then an unsteady rise with short periods of leveling off.  Let’s see how this correlates to mortgage interest rates today.

We are clearly in an inflationary cycle

Inflation can be thought of as too much money chasing too few goods.  That’s a simplification, but that’s the essence of it.  In the last couple of years, we’ve seen the government flush money into the economy through stimulus packages, low interest rates, and by buying mortgage-backed securities in order to drive mortgage rates lower.  At the same time, we saw the availability of goods drop precipitously due to pandemic-fueled supply chain problems.

The result was predictable – too much money chasing too few goods leads to inflation.

Mortgage Interest Rates Today and Inflation

We can argue that the Fed overshot their target in trying to avoid a recession, and that’s fair.  But what’s done is done, and now they have a beast to tame.  They stopped purchasing mortgage-backed securities and have begun allowing their holdings to organically decline by both the scheduled paydown of principal of existing loans and payoff through refinancing or sales of homes.  With the biggest buyer (the Fed) out of the market, other buyers of mortgage-backed securities (think insurance companies, hedge funds, mutual funds) have less competition for the pools of loans.  Fewer buyers puts upward pressure on interest rates.  At this point the Fed intends to increase the retirement of assets (the mortgage-backed securities they bought) starting in September, including (when deemed appropriate) selling existing bonds backed by pools of mortgages in the open market to other investors.  This will put significant pressure upward on rates.

If it sounds like I’m being negative, I’m not.  But it’s good to know what to expect.  Movements by the Fed in the next few months will have a negative impact on mortgage interest rates.  It’s possible, if inflation cools enough, that institutional investors will step up to purchase pools even though the yield is falling, but we’ll have to wait and see on that.

Let’s Look at Mortgage Interest Rates for the Last Two Years

In the chart below we track the U.S. Ten-Year Treasury Yield, the Fannie Mae 60-Day Yield, and the Freddie Mac Mortgage Market Survey.

Interest rates rise with inflation
Interest rates rise with inflation

Closer Look:  If you want to know why those three – How Can You Track Mortgage Rates? – Loan Guide

You can see a steep jump in interest rates beginning in January, about when the preliminary December CPI numbers came out.  We had already seen annual inflation rates over 6% in October and November, but in December we crested 7% and established a clear trend.  (See first chart above)  This was apparently the moment when mortgage investors really took notice and reacted to the news.  In early May the Fed raised short-term rates to dampen inflation, and you can see in the 10-year T-Bill that it had an immediate effect – The curve flattened out as bond buyers waited to see what would happen with inflation.  Referring back to the first chart, you can see that inflation moderated slightly in April.  In chart 2, you can see that mortgage rates leveled off, too.

Then in May and June inflation numbers spiked back up.  Since we don’t know about them until the next month, You can see mortgage rates jumped in early June when that data came out.  Interest rates actually came down slightly in July, but in the last two weeks have bounced right back up.  From the green line (the best measure of rates that people actually got) it’s clear that mortgage interest rates are rising again this week.

I also like to look at lender margins, since that’s the last component of the pricing pyramid that determines what you pay for a mortgage.  Look at the chart below.

Interest Rate Update - Lender margins
Lender margins are the last component of retail rates

You can see that when lenders were swamped with work their margins were very high.  As the market slowed, their margins predictably fell.  They can only fall so far, though, before it is no longer economically viable to be a lender.  That margin appears to be about 0.400%.  (This means that the interest rate you would pay on any given day would be about 0.400% higher than the Fannie Mae yield, plus loan costs representing the lender’s cost to produce the loan.)  In the last couple of months we have seen massive layoffs in the industry and a handful of companies closing certain operations, or closing their doors entirely.  This will take a few months to settle out.  My best guess is that we’ll see more stability in the industry by next spring, at which time lender margins are likely to rise a little.

I do not see lender margins compressing any more than this, so the only path to lower interest rates has to be investors willing to take a lower yield when they invest in mortgage-backed securities.

Higher Mortgage Interest Rates are Here to Stay

All of this points to a near-term future of mortgage interest rates today that are likely to remain about where they are now, or a little higher.  There is no compelling data to suggest we’ll see mortgage rates fall in any significant way anytime soon.

The good news is that rates are still low from an historical perspective and it’s much easier to get a loan through the system than it was only a few months ago.  The number of active listings has increased, and many buyers have withdrawn from the market either because they no longer qualify, or because they are discouraged.  If it’s a good time for you to buy a home, you’ll have less competition and an easier, faster process in closing.

Comments are welcome and encouraged below.

Casey Fleming, Mortgage Advisor and Author of The Loan Guide: How to Get the Best Possible Mortgage

About Casey Fleming: Casey Fleming is a veteran mortgage advisor (NMLS 344375) and Author of The Loan Guide: How to Get the Best Possible Mortgage.  Casey advises clients throughout California and is based in the heart of Silicon Valley.  He writes articles regularly for several online publications, is a subject-matter expert for two prominent finance-related sites, and is regularly quoted in articles for many other publications.

This article represents the opinions of Casey Fleming, and not necessarily those of Any company or organization cited or mentioned in this web site.  This analysis was prepared with the best information available at the time it was written.  We do not have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source.  No warranty is made that the outcome will reflect the projections in this article, and neither the author nor are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.

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Resources used in this article:

Will the Federal Reserve Sell MBS? – The Baker Group LP (

The latest move by the Federal Reserve – July 27, 2022 (

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