When the 10 yr bond rates goes down, do mortgage interest rates go down or up?

Question

How is it related? When the rates for the 10 yr bond goes down, does the mortgage interest rates go up or down with the bonds?

Why is there a relation and how does it work? Please help you smart finance peeps out there! : )

Answer 1

Mortgage rates will track bond rates, but not always as quickly and not necessarily.

Mortgage companies do not take your payments and invest in bonds or oil or gold.

Mortgage companies have to make a decision as to where to invest their money, and they do, in you and your house. The interest rate on your mortgage is their rate of return for the money they lended you. If they could get a higher rate of return by lending to the federal government, they would. They can't. They take take a chance on you, the individual borrower, and charge you more than the federal government (mortgage rates are higher than government bond rates, how much more depends on how likely you are to pay them back -- which is supposed to be reflected in your credit score).

In order to get more money to lend to other consumers many banks or mortgage companies will package up loans with similar levels of risk and sell them as bonds to another investor (usually a bank).

Now you can see why mortgages track bond rates!

Answer 2

The 10 yr bond rate is usually slower to react than the short term bond rates. Usually if mortgage rates have gone up, then eventually all bond rates will go up. The opposite is true too. Interest rates all follow the same pattern of ups and downs because the interest rate is set by the Federal Reserve and all companies follow their lead in order to be competitive and still make a profit.

Answer 3

US Govt treasury bonds, 10 year, 30 year, etc, are the benchmark credit-risk free rate. Think of it as the "minimum cost" of borrowing money. These rates move up and down to a variety of factors - overall health of the economy, rate of inflation, or as a "safe haven" in times of crisis, to name a few.
Mortgages have credit risk - the risk of default. This can depend on the credit-worthiness of the borrower as well as the length of time they are planning to borrow. So to compensate a lender, they demand a risk premium (additional interest) over what treasury bonds would pay. This is called the spread.
Now the relationship is that there will always be a spread between treasuries and mortgages. Now this spread is not a fixed amount, it is determined by the market any given day.
When Treasury bonds decrease in yield, mortgage rates tend to decrease in yield too, as the "risk free rate" (treasuries) is now lower. However, because that credit spread is determined by other factors (defaults, credit standards, etc) mortgage yields might not go down as much (known as spread widening) or they might go down more than treasuries (know as spread tightening.)
Two examples:
Before this year, the market did not see much credit risk. Afterall, with a booming housing market, if someone couldnt make their payments, they could sell their house and everyone would get their money back. So consequently, the spread (yield difference) between treasury bonds and mortgages was tightening. Lets say the difference is 2 percent.
10 year treasury = 5%, Mortgage = 7%. As the mortgage spreads tighten:
10 year treasury = 5%, Mortgage = 6.5%.
This is spread tightening.
Now lets look at this year. In a nutshell, the housing market is soft, which means if someone cant make their payments and tries to sell their house, they might not get enough money to pay everyone back. This would result in default. So the risk premium (spread) increases. In this case:
10 year treasury = 5%, Mortgage = 7%. As the mortgage spreads widen:
10 year treasury = 5%, Mortgage = 7.5%.
This is spread widening.
So putting this altogether: treasuries move up and down based on their own reasons - economy, inflation, etc. Mortgage rates use this rate as a benchmark, but will add their own credit-risk spread on top of that.
So mortgage rates will generally track treasuries, but sometimes not as fast.

Right now, you have a situation where treasury yields are going down, and mortgage rates are going up. Why?
Your mortgage is packaged and sold to investors. With credit risk getting worse (more people defaulting on their mortgages), these investors are selling these investments. They are taking their money and investing it in the treasury market. This is called "flight to quality" This increased demand for treasury bonds is pushing yield down.
But mortgages are getting riskier, so that credit spread is getting wider. Now you have
10 year treasury = 5%, Mortgage = 7%. As "flight to quality" occurs:
10 year treasury = 4.75%, Mortgage = 7.5%.

I hope this helps you understand the relationship. Obviously the rates were purely illustrative, and the overall factors that affect the market were simplified, but it should give you the basic idea

Answer 4

when the 10 year interest goes down mortgage rates go down and vice versa.

its a benchmark comparison but its not lock-step.... its in anticipation of future interest rate decisions as well as whet the open market resale of the collateralized loan will bring in.

lately you've seen lot of tightening of credit in the mortgage market due to fears of defaults that wont exist in the 10 year treasury notes... so there has been a disconnect of late....

but as a general rule they are related and move in similar directions due to similar driving factors.... primarily the federal reserve bank lending rate.

Answer 5

No
Google this and you will get better answers then what are here
Mortgage co are invested in the bond market
They take your money from your mortgage payments and invest it
right now Gold and oil

Answer 6

I know this - great fortunes are made by people who have big money when the points are down..
When the money market interests are down real estate and all businesses - sell more - they move the merchandise'
To know more study the stock market results. Eventually you can make a good guess on the current value of all things.

Answer 7

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