Why Aren’t Mortgage Rates Falling with the Fed’s Rate Cuts?
The Fed influences Treasury yields in a couple of ways. First, by setting the federal funds rate (the interest rate banks charge each other), the Fed indirectly influences all sorts of interest rates, including those on Treasury bonds. This is especially true for short-term Treasuries. The Fed’s announcements and forward guidance about future economic policy affect investor expectations about inflation and growth. This impacts how investors view the attractiveness of Treasuries, influencing their demand and, therefore, their yields. Essentially, the Fed sets the overall tone for interest rates and provides vital clues about the economy’s future direction, both of which significantly impact the Treasury market.
Most recently, The Federal Reserve made its third consecutive rate cut on Dec 18th, 2024 (Federal Reserve issues FOMC statement); but you may have noticed that your bank’s mortgage rates haven’t budged much. It seems counterintuitive, right? Here’s a breakdown of why this is happening:
It’s Not Just About the Fed:
While the Fed’s actions influence the overall economy, mortgage rates are primarily tied to the yields on 10-year Treasury bonds. These bonds are seen as a safe investment, and their yield (the return investors get) reflects the market’s long-term outlook on the economy.
Think of it Like This:
Imagine you’re a lender with money to invest. You can either:
- Lend to the government by buying a Treasury bond, with a guaranteed return and very low risk.
- Lend to a homeowner or investor by offering a mortgage, which carries more risk (like the borrower defaulting).
To make mortgages attractive, lenders must offer competitive rates with Treasury bonds, plus a little extra to compensate for the higher risk by offering higher yields by a margin called spread.
So, What’s Keeping Mortgage Rates Up?
- Inflation: Even with the Fed’s cuts, inflation is still a concern. Lenders need higher rates to offset the erosion of future payments due to inflation.
- Strong Economy: A robust economy can push mortgage rates up. Stronger economic growth can lead to higher inflation expectations, which puts upward pressure on those all-important Treasury yields.
- Investor Demand: Investors are still hungry for the safety of Treasury bonds. This keeps Treasury yields high, and mortgage rates follow suit.
The Bottom Line:
While the Fed’s rate cuts are a step in the right direction, they don’t directly control mortgage rates. A complex mix of factors, including inflation, economic growth, government policies, and market expectations, all play a role.
At Realist Capital, we stay ahead of these market dynamics to operate at the highest level and perform for our investors. Contact us today to learn more about real estate investing and upcoming opportunities.
