What Janet Yellen Confirmation as Treasury Secretary Could Mean for Mortgage Rates

Photo to accompany story about Janet Yellen. Getty Images / Mark Wilson
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This week, the Senate overwhelmingly voted to approve Janet Yellen as the first female U.S. Treasury secretary, and investors began speculating how her policies could affect historically low mortgage rates

Before she’d been nominated, most of the experts we talked to said that Janet Yellen’s policies would likely boost the economy and push inflation upward, but none of them are expecting major rises in mortgage rates over the next year.

“Even if we see some inflation as we get out of the pandemic, as people start to spend more money, I think the Federal Reserve is going to be hesitant to raise interest rates,” says Daryl Fairweather, chief economist at Redfin. 

Yellen echoed President Biden’s calls for additional stimulus measures calling on Congress to “act big” to support the weakened economy. Biden introduced a new $1.9 trillion proposal last week that included $1,400 direct payments, a federal unemployment benefit of $400 per week, and an extension of the eviction and foreclosure moratoriums.

The government spending, coupled with the high likelihood of more to come, should give a boost to the sagging economy, and could increase inflationary pressures. Bond market investors responded to the expectation of increased government spending, which is part of the reason Treasury yields recently jumped to 1% for the first time since March last year. “Janet Yellen has always been more focused on trying to reduce unemployment, even if it means slightly higher inflation,” says Lawrence Yun, chief economist with the National Association of Realtors. 

So now that Yellen has been confirmed, what exactly does all of this mean for mortgage rates going forward?

Where Will Mortgage Rates Go From Here?

The same factors that impact 10-year Treasury bond yields also affect 30-year mortgage rates. Historically, the two have moved in tandem although for much of the pandemic, the spread between Treasury yields and mortgage rates was higher than normal. “Recently, that gap has closed, there’s actually not much of a buffer left,” says Matthew Speakman, economist at Zillow. 

If bond yields increase, mortgage rates would also increase, Speakman said. “But a spike is not inevitable,” he said. “There’s still a lot of uncertainty in the economy regarding the factors that impact rates.”

Based on the bond yield growth we’ve seen over the past month, it seems investors expect to see growing inflation, but how much it increases and how quickly aren’t known. How effectively we can deal with the effects of the pandemic and how quickly the economy recovers will play a big role in what happens with mortgage rates. “Inflation is the thing to watch in terms of what’s going to move mortgage rates,” Fairweather believes.

One thing that’s easy to miss when forecasting where mortgage rates will go is the human element. “Expectations about rates matter. If investors believe that rates will stay low, that can be a self-fulfilling prophecy,” Fairweather says. “Over the last 20 years, rates have been falling and it seems like not just in the U.S., but globally, we’re in a low-rate environment.”

Rates remain at historic lows in the early part of 2021, and they should still remain favorable for borrowers in the near future. According to Yun, we can expect to see modestly higher mortgage rates, maybe 3% by the middle of the year.