Who Sets Mortgage Rates? The Truth Behind the Headlines.

Who Sets Mortgage Rates? The Truth Behind the Headlines

Spoiler alert: this article will jar your perceived understanding of mortgage rates. Mortgage rate articles dance around the truth, with top media sources still incorrectly citing the Federal Reserve as the leading contributor for mortgage rates.

The fact is, the Federal Reserve does not set mortgage rates. Their rate cuts have had the OPPOSITE effect on mortgage rates for the past five rate cuts.

Federal Reserve Rate cuts of last year (red line on graph) gave us mortgage rates spike (green line on graph):

So, if the Fed doesn’t set mortgage rates, who does? By the time you finish this article, you’ll have a better understanding of what drives mortgage rates than anyone else you know. You’ll also be able to leverage this new-found knowledge to act with confidence, independent from the herd. Think more like Warren Buffet: “Be fearful when others are greedy and be greedy when others are fearful.”

The Main Driver: The 10-Year Treasury Yield (TNX^)

If this article were a recipe, the 10-Year Treasury Yield (ticker symbol: TNX^) would be the main ingredient. It’s the one factor truly worth watching closely.

As you can see, the relationship is so precise that mortgage rates are said to be benchmarked to the 10-Year Treasury Yield.

To simplify: your mortgage rate is the Index (10-Year Treasury Yield) plus a Margin.

That’s it.

Nothing else matters to the market rate of mortgages.

But wait, who sets the price of the 10-Year Treasury Price and Yield?

Who sets the 10 year Treasury Price?

An analogical question would be “Who sets the price of Apple Stock (AAPL)?”

But we already know the stock Sellers and the stock Buyers do.

They set the price through “bids” and “asks” via the stock market.

Rule #1: The Price of the Bond runs INVERSELY to the Yield of Bond.

So how is the 10 year Treasury Yield Derived?

If the Bond becomes more desirable (to investors) they will pay more for the Bond.

⬆️Bond Prices up.

But the Yield will drop ⬇️

Conversely, if the demand just isn’t there for the bond, investors will offer to pay less for the bond at auction:

⬇️ Bond Prices drop

But the Yield will increase ⬆️

let’s substitute “Yield” with “Mortgage Rates” and rerun the rule here while admittedly oversimplifying:

How do home buyers get a LOWER mortgage rate?

⬆️Bond Prices go UP.

Then Mortgage Rates will drop ⬇️

And how do home buyers pay a HIGHER interest rate?

⬇️ Bond Prices drop

And Mortgage Rates will increase ⬆️

Got it?

Supply and Demand: A Battleground for Bonds

So to continue with the oversimplification theme, mortgage rates rise when bonds lose popularity.

If bonds are the investment flavor of the day, month or year, then mortgage rates will lower, fall, or potentially plummet.

EXAMPLE: Remember Quantitative Easing (QE)? It was a ploy. By printing money, the Government bought their own bond offerings. Kind of like Up Voting your own profile in a beauty contest you’re competing in.

It worked. Rates sank to unprecedented artifice lows.

A 2 or even 3 percent interest rate is literally FREE, when the inflation rate (on the home it’s backing) is running above that rate. Great for GenX and most Millennials.

But in a Buckminster Fuller’s Law of Precession manner, if screwed Gen Z’s homeownership ability for the better part of their lifetime.

The government forgot to do some “what if’s”. As in:

What If this Quantitative Easing was going to CAUSE snowballing inflation (on real estate).

What if this Quantitative Easing was going to create a future real estate epidemic we would come to call “The Lock Up Effect”.

This leads into the discussion of buyer’s market vs seller’s market.

The Supply of Bonds

The US government must sell bonds to survive. Without the sale of this debt, the entire operating system of the US could implode. This is why we are always bumping up against the debt ceiling,it’s a constant, and growing, supply issue. With more debt being issued than ever before, the supply of bonds is at an all-time high.

The Demand for Bonds

The US, even with its budget management challenges, has long been considered the safest investment in town because the US Dollar is the world’s reserve currency. This creates massive international demand for our debt.

However, things are changing. Over 50 countries, including the full BRICS membership, are actively working to move away from the US Dollar. Historically, China (the “C” in BRICS) was one of the biggest buyers of US debt; now, they’re selling ALL US Debt, further competing with our own sales process and impacting demand.

There are 4 dozen countries routing against the US Dollar. Specifically, the 10 countries with full BRICS membership and 9 countries with Partnership Status. 32 other nations are actively seeking membership. That’s 51 counties. I could not name 51 countries from memory.

Just 2 of those countries represent over 1/3 of the world’s population – that’s major juju down voting the US dollar.

Additional Factors Potentially Affecting Your Mortgage Rate

Your Personal Profile and Credit

This doesn’t affect the market rate, but it can significantly impact the Add On’s to your rate. These are known as Loan Level Price Adjustments (LLPAs). While a lender can’t say no to a client who may be less profitable, they can charge those clients more based on the risk their profile represents.

This is where you can game the system. I’ll provide you with street-level advice on how to expertly prepare your personal profile to secure the best LLPAs.

The Federal Reserve’s Role

Mostly, this is noise. Media hype and clickbait. The Fed’s rate cuts sell more ads than the Super Bowl, but they don’t move mortgage rates in a predictable way. You understand now that the 10-Year Treasury Yield is the only number you need to bookmark.

Quick Mortgage Rate Myths Debunked

Myth: The Fed lowers its rate, so my mortgage rate drops.
- Fact: False. For the last 5 cuts, mortgage rates have actually spiked.
Myth: I should wait for rates to drop before I start looking for a home.
- Fact: False. You’ll be competing with the entire herd. Strategic timing based on market facts, not headlines, is the key.
Myth: All lenders offer the same rates.
- Fact: False. Specific lender’s business practices (including excessive advertising budgets i.e., owning a sports stadium) directly impact the rate you are offered. Find a First Time Home Buying Mortgage Broker qualified to gain you access to proprietary programs.

Summary: Lower Future Mortgage Rates are dependent on the Popularity of the 10 Year Treasury.

If you see a path to the 10 Year Treasury gaining popularity expect lower rates.

If you see continued erosion of the US Dollar from inflation, excessive money printing, or additional Debt Quality downgrades expect higher rates.

This article has just deputized you to peel off from the social-media-addicted herd. Your pursuit of your Home Buying Mission is now grounded and calculated, not reactionary and convulsive. You are no longer a consumer in the rat race; you are a prepared and strategic homebuyer.

If you found this article by accident and want to learn more about our custom guidance for apartment tenants seeking to exit the cattle call that is tenancy, grab a coffee for yourself and visit our Tenants Lounge.

Your Mortgage Glossary for Your Pickleball League

10-Year Treasury Yield (TNX^): The interest rate on a 10-year US government bond. It’s the primary benchmark for mortgage rates.
Federal Funds Rate: The rate at which banks lend money to each other overnight. It’s set by the Federal Reserve and is often the “rate cut” you hear about in the news.
Quantitative Easing (QE): An unconventional monetary policy where the Fed buys long-term securities to lower interest rates and increase the money supply. It led to historically low mortgage rates but contributed to inflation.
Loan Level Price Adjustment (LLPA): A fee or interest rate increase applied to a loan based on factors like credit score, down payment, and loan-to-value ratio.
BRICS: An association of emerging national economies: Brazil, Russia, India, China, and South Africa. They are actively seeking alternatives to the US Dollar as the world’s reserve currency.
Reserve Currency: A foreign currency held in large quantities by central banks and used to settle international debts. Currently, the US Dollar is the world’s primary reserve currency.
The “Lock Up Effect”: You may have read articles looking for sympathy for a “locked in” or “trapped” homeowner. Please know this is a voluntary condition. These are homeowners who took advantage of historically low rates during a period of Quantitative Easing (QE). They are now “trapped” because they can’t replicate that deal on a new home. This condition is not a crisis; it is simply a reality for those who previously benefited from a unique market event.

Who Sets Mortgage Rates? The Truth Behind the Headlines