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If you've been frustrated by high mortgage rates, you're not alone. Since 2022, borrowing costs have surged, making homeownership feel out of reach for many. But what actually controls mortgage rates? Most people assume it’s the Federal Reserve’s interest rate decisions—but the real driver is something less obvious: the 10-year treasury yield.
What Is the 10-Year Treasury Yield?
The 10-year treasury yield is the interest rate the U.S. government pays when it borrows money for 10 years. This happens when investors buy treasury bonds (a type of loan to the government). In return, investors receive regular interest payments, and after 10 years, they get their money back. Because these bonds are considered super safe, their yields play a major role in shaping borrowing costs across the economy, including mortgage rates.
How the 10-Year Treasury Yield Affects Mortgage Rates
Mortgage rates were higher in 2022 than the previous few years, largely due to inflation. Since then, rates have remained higher than we’d all like. Many assume mortgage rates move in lockstep with the Fed’s rate hikes, but that’s only part of the story. Mortgage rates actually follow the 10-year treasury yield more closely. When treasury yields rise, mortgage rates usually rise too. When they fall, mortgage rates tend to drop as well.
Why Mortgage Rates Move with the 10-Year Treasury Yield
Lenders set mortgage rates based on the 10-year treasury yield, typically adding 2-3% on top. This markup ensures that mortgage-backed securities (bundles of home loans sold to investors) remain attractive. If treasury yields rise, borrowing money becomes more expensive, pushing mortgage rates higher. Conversely, when yields fall, mortgage rates usually follow.
Take a look at the graph below to see how closely they track each other over time:
Currently, treasury yields are still higher than they were just a few years ago, which is why mortgage rates remain elevated.
The Plan to Lower Treasury Yields
New Treasury Secretary Scott Bessent has announced the administration is focused on reducing the 10-year treasury yield to make home buying more affordable. Instead of pressuring the Fed to cut interest rates, the plan is to slash regulations, pass tax reforms, and lower energy costs—moves that could help bring yields down naturally.
However, Federal Reserve experts caution that reducing treasury yields isn’t that simple. Inflation expectations, government debt levels, and global market conditions all play a role. Cutting taxes and regulations alone may not be enough to bring mortgage rates down significantly.
How Inflation Affects Treasury Yields and Mortgage Rates
As of March 3, the 10-year treasury yield sits at 4.195%. The Treasury Department is working to prevent it from hitting 5%, a level that could rattle the stock market, housing market, and loans tied to interest rates.
Austan Goolsbee, President of the Chicago Federal Reserve, explains that inflation is a key reason treasury yields remain high. For mortgage rates to drop meaningfully, the economy will likely need policies that curb inflation.
What’s Next?
The current administration is making housing affordability a priority, but mortgage rates depend on more than just government policies. Inflation, investor confidence, and overall economic trends will determine where rates go next.
For now, watching the 10-year treasury yield can give us a good idea of where mortgage rates might be headed. We’ll be keeping a close eye on these trends and will continue to update you on mortgage rates, housing affordability, and what it all means for home buyers. Want more housing news? Check out our February Real Estate Market Update!
