Mortgage Rates Are Rising After the Federal Reserve Rate Cut: What's Behind It

Mortgage rates are rising after the Federal Reserve rate cut, and it may seem counterintuitive at first. The Federal Reserve cut the federal funds rate by 25 basis points in September 2019.

This cut was intended to boost the economy by making borrowing cheaper. However, it had an unexpected effect on mortgage rates.

The yield on 10-year Treasury bonds, which is closely watched by mortgage lenders, has actually risen since the rate cut.

The Federal Reserve's rate cut was expected to lower mortgage rates, but instead, the opposite has happened. The average 30-year fixed mortgage rate has jumped about 47 basis points since the Fed rate cut, to 6.62% from 6.15%.

This increase is closely linked to the 10-year US Treasury yield, which has also risen over the period. The bond market is a global market with many actors and moving parts, making it difficult to pinpoint all the factors for market movement.

Mortgage rates have increased since the September Fed meeting because longer-term rates have also increased, mostly as a function of markets pricing in lower recession odds, thanks to strong payroll data especially.

Here are some key factors contributing to the rise in mortgage rates:

This situation is dire, and one of the only quick and impactful ways to aid in the issue is lower interest rates and re-emerging quantitative easing, which will likely mean rapid Fed rate cuts with mortgage rates and DSCR loan rates following suit.

Mortgage rates have been on the rise, and it's not just because of the Federal Reserve's interest rate cuts. In fact, the opposite has happened - the 30-year fixed mortgage rate has jumped about 47 basis points since the Fed rate cut, to 6.62% from 6.15%. This is according to data from Mortgage News Daily.

The 10-year Treasury yield has also risen since the rate cut, signaling that investors feel good about the economy and are pricing in less easing going forward. This shift in investor sentiment has contributed to the rise in mortgage rates.

A strong labor market and a healthy economy can also drive up mortgage rates. The September jobs report showed a surprise decrease in the unemployment rate and blowout nonfarm-payroll additions, reinforcing this trend. The 30-year fixed mortgage rate has been climbing each week, reaching 6.44% on October 17, according to Freddie Mac's Primary Mortgage Market Survey.

The impact of rising mortgage rates on consumer budgets can be significant. For example, an increase from 6.08% to 6.44% raises the monthly payment by $47 on a 30-year, $300,000 mortgage. Over the life of the loan, this adds up to more than $17,000 in additional interest.

Here are some key factors contributing to the rise in mortgage rates:

Mortgages follow bonds, not bank rates. The Federal Reserve controls the rates at which banks loan money to each other overnight, but mortgages have a much longer lifespan.

Mortgages closely track 10-year U.S. Treasury notes – debt issued by the U.S. government and traded by investors in the bond market. Fannie Mae highlighted this in an article laying out factors influencing rates for 10-year Treasury notes.

Investors' expectations for monetary and fiscal policy, economic growth, and inflation drive the direction of mortgage rates. If investors expect inflation to be higher, they want higher yields so their investments don't lose value.

The 10-year Treasury yield has been rising over the past few weeks, and it's a major factor in the increase of mortgage rates. A 30-year fixed-rate mortgage averaged 6.08% on Sept. 26, the week after the Fed announcement.

The spread between mortgage rates and bond yields is quite large. On Sept. 18, when the 30-year fixed-rate mortgage averaged 6.09%, the 10-year Treasury averaged 4.10%. This is because mortgages are much riskier investments than debt issued by the government.

Individual homeowners can and do default regularly, making mortgages riskier than government debt. This risk is reflected in the higher interest rates for mortgages compared to bond yields.