What’s Up With Mortgage Rates!?

It’s “interesting” how some people just don’t understand how mortgage rates work.

There’s a train of thought that says: “as the Fed lowers interest rates mortgage rates will come down.”

That’s just not so. The Fed only controls the Fed Funds Rate, which does impact floating rate instruments, like, say, credit cards and high-yield savings accounts. But not mortgage rates.

People confuse the post-2009/10 housing run-up as being correlated with a historically low Fed Feds Rate.

Mortgage rates move in relation to the 10-Year Treasury Note. And when mortgage rates were sub-4%, the 10-Year was low, not because of anything in particular that the Fed was doing, but because the 10-Year was low.

Why was the 10-Year low? Because people weren’t terribly worried about the Federal Deficit and Debt – read: interest expense.

“Interest Expense” is the cost of servicing the national debt; i.e. paying the interest on all the Treasury Bills, Notes and Bonds. It used to be that the US’ interest expense share of the yearly budget was lower, and not a huge concern.

Well, because BOTH parties handed out money like crazy Grandmas during the Pandemic and have continued to spend (and cut/keep-taxes-low) like drunken sailors, the cost to service our debt has increased, both nominally, AND as a share of the yearly budget – as recently as 2022, it was 8%, it’s now 17%.

Sufficiently discouraged? Well, it’s unlikely to get any better.

With recent legislation, it will only get worse: more spending and less tax revenue. This means more interest expense and more worry in the bond market about the US’ ability to service its debt.

So, no, the 10-Year Treasury Note won’t be going any lower, any time soon.

Nor will mortgage rates.