These days, it seems like everyone is talking about the rising interest rate environment, the Federal Reserve’s monetary policy decisions, and the potential impact on mortgage rates. The situation can be quite intricate, and while I’m not a mortgage broker, let’s dive into it a little and try to make sense of it all.
Currently, in July of 2023, the federal funds rate stands at 5 to 5.25%. The general consensus in the market is that the Federal Reserve will implement another quarter-point increase in late July. However, here’s where things get a bit puzzling: the 10-year Treasury yield is only around 3.8% today. How can this be? Isn’t it the Fed who sets interest rates, which then influence government bond yields and subsequently affect lenders’ pricing? Well, yes, but not quite.
The Federal Reserve does establish the overnight lending rate, commonly known as the federal funds rate. However, when it comes to pricing yields for government debt, such as the 10-year Treasury, it’s the bond market that takes the lead. The price of the 10-year Treasury is determined by the demand for those bonds. If the market is willing to pay a price that corresponds to a 3.8% yield on the 10-year Treasury, it indicates the market’s expectations for the future of the bond market. Therefore, this becomes a more reliable indicator of where mortgage rates might be headed.
Just a few weeks ago, the 10-year Treasury yield surpassed 4%, but it has since settled down. The reason for this calm can be attributed to the recent Consumer Price Index (CPI) update. The 12-month CPI came in at only 3%, which is quite close to the Fed’s target of 2%. However, it’s important to note that the core CPI, which excludes volatile food and energy prices, remains at 4.8%, catching more attention from policymakers. As a result, there is widespread anticipation that the Federal Reserve will proceed with another rate increase in July.
To gauge the expected direction of rates and the market’s sentiment, it is crucial to keep a close eye on the 10-year Treasury yield. This yield acts as a key indicator of the bond market’s outlook, which in turn influences mortgage rates. As we move forward, staying informed and aware of these indicators will empower us to navigate the ever-changing landscape of interest rates and make informed decisions regarding our financial endeavors.
