Just a quick interest rate update. Rates have risen over the last week due to uncertainty about the debt ceiling negotiations, and whether the U.S. Treasury will continue to pay its bills.
Let’s look at the chart below. The blue line tracks the yield on the 10-year U.S. Treasury Certificates (AKA T-Bills or Treasury Bonds.) Mortgage interest rates tend to track this index as T-Bills and Mortgage-Backed Securities (MBS) are debt instruments that compete for the same investment dollars.
The Orange line is the Fannie Mae 60-Day yield. Think of this as the wholesale interest rate that all mortgage lenders are offered. When they make your mortgage, this is the price they pay for the money they lend you.
The green line is the Freddie Mac Mortgage Market Survey. This is the average interest rate offered to borrowers over the previous week, as measured by a comprehensive survey of lenders nationwide. I think of this as the retail interest rate.
You’ll notice that the 10-year T-Bill has been relatively stable this year. With a low of about 3.4% and a high just over 4%, the spread has ranged only about 0.6% this year.
The Fannie Mae 60-day yield, however, has been more volatile, ranging from about 5.25% to over 6.5%—a range of 1.25%, more than double the range of T-Bills.
Retail mortgage rates, on the other hand, are a little more stable, with a range of about 0.75%. Why? Mortgage lenders have been very slow this year, and are willing to reduce margins in order to keep some business flowing through their pipeline.
Now, notice the uptick in Treasuries and the Fannie 60-Day yield in the last three weeks. This uptick in interest rates is entirely due to concern over the debt ceiling negotiations. It hasn’t shown up in the retail interest rate yet because this is a backward look. Next week’s data will undoubtedly show a sharp increase in retail interest rates.
Now let’s take a look at how the margins impact the interest rate you’ll pay for your mortgage.
The wholesale cost of funds is determined by institutional investors who purchase the securities backed by mortgage pools. This is how Fannie Mae and Freddie Mac get the money they need to purchase your mortgage. An institutional investor might consider investing in Treasury Bills, but they also might consider mortgage-backed securities (MBS.) Treasury bills have a 100% chance of being repaid.* MBS, however, are not guaranteed. They do perform well most of the time, however, so given a large enough increase in the yield compared to Treasuries, they are an attractive investment.
Notice that they tend to react quickly to changes in the yield on T-Bills. Quick jumps in the yield tend to correct quickly, quick drops do the same. The large range in the margin simply reflects the changes in perceived risk of the investment on a daily basis. Bad news about the housing market? That’s a day when the margin will probably rise.
The orange section is the margin retail lenders add for their profit. Margins compress when they need to in order to keep orders coming in, and rise when they can.
The next week will be most interesting. Will the U.S. default on our debts? Will the perceived risk of T-Bills increase, causing Treasury yields to jump? If they do, will mortgage interest rates follow?
We have no idea. We are in uncharted waters. The interest rate you’ll pay could be much higher after next week, or it could go back to the slow downward trend we’ve been experiencing so far this year.
We shall see.
- If the debt ceiling is not raised by June 1 and the U.S. fails to make any payments on its debt, this perception could change.
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Casey Fleming, Mortgage Advisor and Author of The Loan Guide (2014) and Buying and Financing Your New Home (2023)
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About Casey Fleming: Casey Fleming is a veteran mortgage advisor (NMLS 344375) and Author of The Loan Guide and Buying and Financing Your New Home writes extensively about real estate finance, the real estate market, and the relationship between economics and finance. He 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 LoanGuide.com are responsible for decisions that you make regarding your choices about your real estate or mortgage or those of your clients.
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Resources used for this article:
10-Year Treasury Bond Rate Yield Chart – Macrotrends
10-Year Treasury Bond History – US Treasury