With strong employment figures, steady inflation, and solid GDP growth suggesting the U.S. economy is on stable ground, how could mortgage rates drop? Let’s dive into the key drivers behind this unexpected trend.
The Link Between Treasury Yields and Mortgage Rates
Historically, the 10-year Treasury yield and mortgage rates share a strong correlation. When the 10-year yield rises, mortgage rates tend to follow. The yield itself fluctuates based on the health of the U.S. economy—rising in a strengthening economy and falling in a weakening one.
But here’s the twist: Looking ahead, this relationship doesn’t always follow basic logic. Recent history gives us a clue about what might happen next.
What Happened in Late 2024?
Following the Federal Reserve’s significant rate cut in late 2024, many expected mortgage rates to drop. That was not what happened. Why?
• Some analysts speculate that investor confidence in the U.S. economy increased due to expectations of a Trump presidency and strong economic indicators.
• Between mid-September 2024 and mid-January 2025, the 10-year Treasury yield jumped nearly 33%, from 3.61% to 4.79%.
Adding to this optimism, markets continued to climb after President Trump’s inauguration, with the S&P 500 up 0.7% and the Dow Jones rising by 1% in a single day on January 21, 2025.
So, How Can Mortgage Rates Fall in a Strengthening Economy?
The answer lies in fiscal policy and quantitative tightening (QT).
Fiscal Policy
The federal government is issuing $2 trillion in new debt, adding to the $8–$10 trillion that matures annually. Foreign buyers like China have scaled back their Treasury purchases.
If the new administration follows through on promises to reduce federal spending, the Fed may allow existing bonds to mature without rolling them over. A reduction in federal spending and new issuance could stabilize or lower Treasury yields, which influences mortgage rates.
Quantitative Tightening (QT)
QT is the Fed’s process of reducing its balance sheet by selling off Treasury securities and mortgage-backed securities (MBS). This decreases liquidity, raises interest rates, and pushes MBS yields higher.
But here’s the key:
The Fed has signaled plans to pause QT in mid-2025. If QT ends:
Demand for MBS could stabilize or increase, lowering MBS yields and, by extension, mortgage rates.
Treasury yields could fall, as markets interpret the end of QT as a dovish policy move.
Liquidity conditions could improve, reducing risk premiums on loans, including mortgages.
Wrapping It All Up
If the Fed pauses QT, it could ease upward pressure on MBS yields and improve liquidity, likely resulting in lower mortgage rates. However, it’s crucial to watch inflation, economic growth, and the Fed’s broader monetary policy for further signals.
Mortgage rates may not fall immediately, but the pieces are in place for downward movement in the near future. Stay tuned, and let’s see how these trends play out in 2025.
With a rich background spanning over a decade in the mortgage and real estate sectors, Terry Roberts has become a cornerstone in guiding over 10,000 clients through the complexities of the home purchasing journey in the United States. His expertise covers a broad spectrum of housing loans including conventional, FHA, VA, and cutting-edge new construction financing options.
Emerging from challenging early life circumstances, including teenage parenthood, dropping out of high school, and facing homelessness, Terry's determination led him to serve in the US Marine Corps. This decision was driven by a commitment to safeguarding freedom and securing a better future for his family. His active duty service in the US Marine Corps, marked by nearly a decade of dedication, instilled in him a profound desire to assist fellow Americans in achieving homeownership, a cornerstone of the American dream that he fiercely believes in.
Terry leverages his profound understanding of the real estate market to empower individuals in their pursuit of property ownership as a strategic investment for wealth generation. His journey from adversity to becoming a beacon of hope and guidance in the real estate domain is not just inspiring but a testament to his commitment to his clients' success.
Connect with Terry Roberts, a proud USMC Veteran and Senior Mortgage Broker (NMLS 397987), for expert guidance on your path to homeownership. Visit www.TerryRoberts.com at E Mortgage Capital, where every client's dream is approached with the respect and dedication it deserves.
Comentarios