Here’s the big number you should be looking for. (iStock)
For mortgage borrowers, examining 10-year treasury rates is more important than most realize. As mortgage rates closely align with 10-year treasury bond yields, tracking this rate can help borrowers assess when to take out a mortgage or when it’s the right time to refinance.
But there is a lot of mystery surrounding 10-year treasury rates. Below is a handbook on treasury bonds, what you need to know and why it is important to pay attention to these rates. For homeowners who are thinking about refinancing, now is the right time to visit Credible to view loan options for more lenders with fewer forms to fill out.
How does the 10-year bond affect mortgage rates?
Any company or entity can sell bonds, but treasury bonds are specifically guaranteed by the government, making them the safest investment, as they are guaranteed for repayment. When investors buy bonds, they practically lend the entity – in this case, the government – money, and instead the investors receive a certain percentage back as “interest” until the bond matures.
Treasury bonds have different maturity rates, ranging from 10 to 30 years. The money is closed for that period of time, but once a bond matures, the owner is reimbursed the face value. In the meantime, investors earn the interest rate set for the investment.
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Here is an important term to know when it comes to bonds: yield.
The yield on US bonds is how much the government will pay for the bonds they sell. When yields are low, it means that demand is high and the government has no problem selling these bonds to investors. When yields are high, it means that demand is low and the government is trying to attract investors with higher interest rates.
The 10-year rate of return on treasury bonds is important beyond the rate of return that an investor can expect; it is also often used as a sign of investor sentiment: whether investors feel confident enough to invest in today’s economy. When demand is high, it often means that the stock market and the economy are in flux, and investors want a “low-risk” investment vehicle. When demand is low, it means that the outlook and return on other investments, such as equities and mortgages, are better (and usually because the economic outlook is also a little pinker).
In the last 20 years, when mortgage rates have fallen, yield rates have also fallen. It was the same for this year without precedent. Following the outbreak of COVID-19, treasury bond rates fell to a minimum due to high demand; many investors wanted bond security during a global health crisis.
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Other factors affecting mortgage rates
Although important, 10-year Treasury yields are just one factor that can affect mortgage rates. Current unemployment rates, inflation rates and current housing conditions influence the poor formula used by government agencies to determine interest rates. With so many factors at play, it’s easy to see why rates can rise and fall weekly and fluctuate depending on what’s happening in the news, around the world, and in the American economy.
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