Why Treasury yields matter more than the Fed for mortgage rates
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The Federal Reserve sets national interest rate policy. But the US central bank isn’t the only big player in this space: Bond investors also have a big influence on consumers’ borrowing costs.
Many types of consumer loans, such as mortgages and auto loans, generally keep interest rates fixed. 10-year US Treasury bonds. This means that when 10-year Treasury yields rise, rates also rise, and vice versa.
Yields on these bonds have risen steadily over the past few months.
The 10-year Treasury yield hit its highest level since January 2025 at about 4.7% as of market close on Thursday.
Rates on 30-year fixed mortgages rose to nearly 6.6 percent on Thursday, the highest level since August 2025. weekly data Posted by Freddie Mac. Ownership of 15-year fixed-rate mortgages rose nearly 6% this week, the highest since June 2025, Freddie Mac said.
These price pressures come alongside other price pressures for households, economists said.
Average gasoline prices rose above $4 per gallon again this week due to renewed tensions in the Iran war. data From the Energy Information Administration.
The Trump administration also imposed a series of new tariffs on dozens of countries on Friday. These import taxes increase costs for consumers and businesses, economists say.
Inflation in the U.S. economy has also been above policymakers’ targets for more than five years, and the fiscal support provided by relatively large tax refunds this spring appears to have weakened, economists said.
“The rise in Treasury yields is another hurdle for households as they take affordability hits elsewhere,” said Thomas Ryan, North America economist at Capital Economics.
“And we’re not seeing much relief on the borrowing cost side of things,” he said.
Why did Treasury yields rise?
The Fed sets an interest rate benchmark known as the federal funds rate.
That criterion has a direct impact on short-term interest rates, such as those on credit cards and other variable-rate loans, said Chad NeSmith, certified financial planner and investment director at Plantation, Florida-based Tobias Financial Advisors.
But bond investors tend to have a much larger influence on the movements of 10-year Treasury yields and other long-term bonds.
More specifically, investors Experts said expectations about future inflation and the course of Fed interest rate policy, which drives bond yields up or down, are important.
For example, if bond investors expect inflation to rise, they will demand higher returns on long-term Treasuries to offset the risk that inflation will erode their future returns, experts said.
“Investors are pricing their own reality, and that has a huge impact on consumers. [rates] they can borrow it,” Ryan said.
In this case, there are many factors that feed investors’ concerns about inflation. oil pricesThere was a sharp jump in July as tensions in the Middle East increased.
Persistently high oil prices could be reflected in prices of things like airline tickets, transportation and goods across the U.S. economy, NeSmith said.
Ryan said Capital Economics expects the Fed to raise interest rates three times this year, not necessarily in response to higher oil prices but rather “a broader view that inflation looks hot.”
Homeownership is probably the biggest impact
Consumers will greatly feel the impact of higher Treasury yields on their ability to buy or sell a home, NeSmith said.
Mortgage rates are more than double what they were during the Covid-19 pandemic, for example, and could rise above 7 percent, experts said.
“This will increase the lock-in effect in the housing market where they feel trapped,” NeSmith said.
For example, consumers who can’t find a good rate for their auto loans may give up on buying a new car, he said.
“It just slows down spending because people are having to borrow a lot more,” NeSmith said.
