Relationship Between Treasury Notes And Mortgage Rates – 3 Facts You Should Know
Relationship Between Treasury Notes And Mortgage Rates – 3 Facts You Should Know
Relationship Between Treasury Notes And Mortgage Rates – 3 Facts You Should Know
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Home Page > Finance > Mortgage > Relationship Between Treasury Notes And Mortgage Rates – 3 Facts You Should Know
Relationship Between Treasury Notes And Mortgage Rates – 3 Facts You Should Know
Posted: Nov 18, 2010 |Comments: 0
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Who wants to know in which direction mortgage rates are headed? Answer: just about anybody who is looking to buy a home, move house, or refinance their home mortgage.
As hard as leading economists try, nobody knows for sure in which direction rates are heading. For the aspiring prognosticator, all we have is the ability to look at recent trends. But, in order to get a better handle on what determines mortgage rate changes, it is helpful to gain an understanding of the relationship between Treasury notes and mortgage rates.
If you are wondering about whether treasury notes affect mortgage rates, check out these 5 facts you should know:
1. Treasury notes are the safest type of investment:
Treasury notes are sold by the U.S. federal government in an auction-style format as a way of paying for the national debt. Yields on Treasury notes go up or down based upon whether they are auctioned at above face value (low yield) or at below face value (high yield).
They are considered a very safe investment because they are guaranteed by the United States government. They are even safer of an investment than are investment options such as CDs and money market funds. Of course, the return on investment for Treasury bills is also very low, due to the low risk.
2. Treasure notes directly affect mortgage loan interest rates:
When Treasure note yields are higher, mortgage interest rates go up. The converse also remains true: when note yields are lower, mortgage interest rates go down. Why is this? The reason is that investors who want a predictable (fixed) return on their investment will shop for Treasury notes – or else they will shop for CDs, money market funds, mortgages, or corporate bonds. Each of these progressively has a slightly higher risk – and therefore return.
3. What are mortgage-backed securities?
Investors looking for a better return on their investment are also willing to take more of a risk. They will buy a mortgage rather than the safer – but lower return – Treasury bills. Instead of buying an actual mortgage, however, these investors will buy mortgage-backed securities.
Of course, as the yields on Treasury bills go up, mortgage lenders will need to provide even higher returns in order to attract lenders. This means higher rates for the mortgage borrower.
Note that the relationship between Treasury notes and mortgage rates only applies to fixed-rate mortgages, not adjustable-rate mortgages. The adjustable-rate mortgages are affected more by the Fed funds rate, which is set by the Federal Reserve.
As you try to guess where mortgage rates are headed, consider these 3 facts you should know about how Treasury bill yields affect fixed mortgage interest rates.
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