A Key Indicator of Mortgage Rates Spiked Last Week. Here’s What It Could Mean for You

Photo to accompany story about 10-year mortgage rates. Getty Images

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A sudden movement in the bond market this week could predict rising mortgage interest rates ahead, financial experts say. 

For the first time since March of last year, U.S. 10-year Treasury bonds hit 1%. This change comes on the heels of Georgia’s two runoff elections concluding this week, in which Democrats won control of the U.S. Senate.

The increase to 1.08%, up from 0.93% at the beginning of the week, was driven by investors’ expectations that when Democrats take control of both houses of congress — and the White House — there will be more stimulus spending in an effort to boost the struggling economy. 

“The bond market did exactly what it should do,” says Logan Mohtashami, housing data analyst for HousingWire. He believes the prospect of more disaster relief combined with increased distribution of COVID-19 vaccines will continue to push bond rates higher if the economy rebounds.

Historically, 10-year Treasury rates and mortgage rates have moved in tandem. So normally, we’d expect to see mortgage rates climb, but so far the increase has been minimal. And sustained rate growth is still dependent on a variety of factors outside of investor optimism on the potential for government aid.

Here’s what this could mean for the housing market.

What Are the Short-Term Implications for Mortgage Rates?

This week, 30-year fixed rates hit another record low of 2.65%, according to the latest data released by Freddie Mac. But don’t read too much into that. “Bond yields have only moved up in the last two days, and Freddie’s survey looks over the last week,” says Greg McBride, chief financial analyst at Bankrate. While mortgage rates aren’t poised to skyrocket, there’s no guarantee rates will remain at an all-time low.

This uncertainty is due to the spread between 10-year U.S. Treasury bonds and 30-year mortgage rates during the pandemic, which have been higher than the historical average. So there’s room for Treasury bond rates to increase without pushing mortgage rates higher. “Mortgage rates were never priced low enough during the crisis. So what has happened is, the 10-year yield has risen since August and mortgage rates have gone down,” Mohtashami says. “All that mortgage rates are doing is catching up to where they should be.” 

Over the past few months, the relationship between Treasury bonds and mortgage rates has begun to normalize. But bad economic news could change that, and Thursday’s Bureau of Labor Statistics employment report showed a loss of 140,000 jobs in December 2020. McBride believes “… that could unwind the gains you’ve seen in the 10-year yields the past few days.”

Is This Your Last Chance to Lock in an All-Time Low Mortgage Rate? 

Whether mortgage rates increase over time will depend on our economic recovery. Consumers likely still have an opportunity to refinance their mortgage or purchase a home with a near record low interest rate. However, mortgage rates could climb higher by the end of 2021.

“We could hit a new low in the weeks ahead, but we think the general trend for mortgage rates will be higher because of the improving economy,” says Danielle Hale, chief economist at Realtor.com. Hale sees 30-year mortgage rates potentially hitting 3.2% or 3.4% by the end of 2021, but only if we see a strong improvement in the economy .

Mohtashami believes that we could have certain “headline risk” that could drive mortgage rates down. “If you get a stock market correction, or any kind of bad headlines, bond yields could go down and mortgage rates could go down,” he says. But, overall the economic aid and vaccine should drive rates higher as the year progresses.