How Rates Are Set, What Moves Them, and How to Communicate
When is the Fed going to lower rates so mortgages get cheaper? This question reveals a fundamental misconception — and it is your opportunity to educate. The Federal Funds Rate vs. Mortgage Rates The Fed sets the federal funds rate — the rate banks lend to each other overnight. This directly affects credit cards, HELOCs, car loans, and short-term bank rates. Mortgage rates are NOT directly set by the Fed funds rate. They are primarily driven by the 10-year Treasury yield and the mortgage-backed securities (MBS) market. The 10-Year Treasury Yield When investors buy more Treasuries (driving prices up), yields fall. When investors sell (prices fall), yields rise. Mortgage rates generally move in the same direction as the 10-year Treasury yield. The 10-year is the benchmark because the average mortgage, while 30 years on paper, is paid off in 7–10 years through sale or refinance. Mortgage-Backed Securities (MBS) Most mortgages are pooled and securitized into MBS — bonds that pay investors as homeowners make payments. MBS pricing directly determines mortgage rates: when MBS prices go up (more demand), rates go down. When MBS prices go down (less demand), rates go up. The Spread Mortgage rates typically trade at a spread above Treasury yields — historically 1.5–2.0 percentage points above the 10-year. In periods of market stress, the spread widens — mortgage rates rise more than Treasuries would suggest. The sound bite the Fed raised rates so mortgages got more expensive is often wrong or oversimplified.