Relationship Between Treasury Notes & Mortgage Rates ~ Hampton Roads Real Estate Ramblings

Relationship Between Treasury Notes & Mortgage Rates

Saturday, October 16, 2010

Hello Hampton Roads,

It's no secret that the Hampton Roads housing marking is advantageous for today's home buyer!  Inventory is aplenty and mortgage rates are at incredible lows. The average mortgage rate on a 30-year fixed loan dropped to 4.19% this week, down from 4.27% last week, according to Freddie Mac. The average rate on a 15-year mortgage is also down to 3.62% from 3.72%. With rates this low a buyer can buy a lot more house for the money or a current home buyer may be able to save more by refinancing.

Speaking of interest rates, have you ever wondered about the relationship between treasury notes and mortgage rates? I knew you had! The answer is that they follow the same trend--when treasury yields are higher so are interest rates on fixed rate mortgages.

Here's the scoop:  Treasury notes are sold via auction by the US Treasury Department. Treasury notes and bonds are denominated by number of years; one of the most popular is the 10-year note (notes are 10 years or fewer). Treasury bonds usually have a 30-year term. The 10-year note affects 15-year conventional loans, while the 30-year bond affects 30-year conventional loans. 

How?

As investors seek higher yields they look to investments that generally have higher risks. Thus enters the mortgage backed security for investors who want to invest in higher yielding mortgages. As treasury yields rise, in order to attract investors, the rate on the mortgage backed security also rises which means higher rates for the borrower. The opposite holds true as well.

Treasuries (notes and bonds) are sold at a set face value and interest rate. If the auction goes well and there is a high demand for the treasuries the yield is low whereas if auction activity is sluggish, buyers will pay less than face value of the treasuries and yield is higher. If note or bond prices rise this means yields are low and interest rates on mortgages will be low. Buying a home becomes more affordable for most buyers--first time home buyers and move up buyers. Conversely if note or bond prices fall, this means higher yields and therefore higher mortgage rates. Housing affordability will drop and it will be more expensive to buy either first homes or move-up homes.

In summary, treasury yields and fixed mortgage interest rates move in the same direction. If treasury yields increase then mortgage rates increase, and if yields drop, look for interest rates to go down in the future.

Thanks for taking the time to read this post and if you have any questions please feel free to contact me!
Happy Home Buying!



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