Mortgage rates are not directly set by the Fed. Instead, they are largely determined by the bond market, particularly the 10-year Treasury yield. Lenders use this yield as a benchmark for pricing home loans, and it has been trending higher since the Fed’s move. Last year showed that mortgage rates don’t always move with the Fed’s benchmark. From mid-September to mid-December, the Fed cut its rate three times by a total of 50 basis points, but the average 30-year fixed mortgage still climbed from 6.09% to 6.85%.
Bond market drives mortgage rate direction
The 10-year Treasury yield rose from 4.04% on September 16 to 4.11% on September 18, and continued climbing to 4.14% by September 19. That’s a 10 basis point jump in just a few days, and the highest level in two weeks. Even though the Fed lowered its benchmark rate, the 10-year yield went up as investors processed the central bank’s cautious outlook and signals that future cuts may be limited. Fed chair Jerome Powell described the cut as a “risk management” move and stressed there are “no risk-free paths” ahead.
When the 10-year yield rises, lenders typically raise mortgage rates to keep returns competitive for investors in mortgage-backed securities. That’s why, even after the Fed cut rates, the average 30-year mortgage rate moved higher, mirroring the jump in the 10-year yield.
Market volatility and housing affordability concerns
The Fed’s projections now show only two more cuts this year, a less aggressive path than many in the futures market had priced in. The bond market’s reaction reflected disappointment that the Fed was not moving faster, with investors recalibrating their expectations for both inflation and economic growth.
While mortgage rates had been easing since mid-July on expectations of a Fed cut, the housing market remains in a slump. Sales of existing homes are still at their lowest levels in nearly three decades, and affordability remains a major concern.
