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The Relationship Between Treasury Yields and Mortgage Rates

The Relationship Between Treasury Yields and Mortgage Rates

| May 26, 2021

Mortgage rates are still around all-time lows but they may be headed higher. The 30-year national average mortgage rate hit an all-time low of 2.82% back in February, but with the U.S. economic recovery in full swing, mortgage rates have started to move higher. The Bankrate 30-year national average mortgage rate is currently 3.1%; however, that is still well below the 20-year average mortgage rate of nearly 5%.

“Higher Treasury yields typically mean higher mortgage rates,” according to LPL Financial Fixed Income Strategist Lawrence Gillum. “We expect the 10-year yield to end the year between 1.75%-2.0% so mortgage rates may move higher from these levels as well, but will likely remain low by historical standards.”

As seen in the LPL Research Chart of the Day, the 30-year national average mortgage rate has historically tracked the 10-year Treasury yield plus 1.75%. The additional 1.75% is a rough estimate of the costs associated with originating a mortgage loan. In 2020, we saw a big divergence from the 10-year Treasury figure as interest rates moved sharply lower but mortgage rates only gradually drifted lower throughout the year. Constrained mortgage origination capacity, due to the COVID-19 uncertainty, was likely the reason mortgage rates didn’t move sharply lower as well. The mortgage industry has increased mortgage origination capacity recently so that the relationship between 10-year Treasury yields and mortgage rates has converged and we expect that relationship to continue. Thus, with our expectation of higher Treasury yields this year, mortgage rates are likely to increase as well.

View enlarged chart.

Low mortgage rates have certainly contributed to the strong demand for residential housing as well as elevated mortgage refinancing activity. While we think mortgage rates are likely headed higher from current levels, we don’t think mortgage rates will return to their historical average anytime soon. As such, barring an unforeseen macro event, housing demand is likely to remain strong in the near term.



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