Treasury Yields And Mortgage Rates Diverging?

It comes as no surprise that mortgage rates, being the interest rates charged on long-term loans collateralized by residential real estate, broadly follow market interest rates largely benchmarked by longer-term Treasury yields.

It is somewhat surprising, therefore to see even a small divergence between Treasury yields and mortgage rates, yet that is exactly what has been happening the past couple of weeks.

While 10-Year and 30-Year Treasury Yields peaked at 4.24% on October 20, and have since declined to 3.82% for the 10-Year Treasury and 4.03% for the 30-Year Treasury, rates on 30-Year mortgages rose from 6.94% to 7.08%. The 15-Year mortgage rate rose from 6.23% to 6.38%.

With less than a month’s worth of data, it is far too soon to extrapolate the larger significance of what is still a very small trend. It may be that interest rates will self-correct, with the divergent rates resolving themselves and the divergence itself ultimately disappearing.

However, it bears watching, because if the divergence persists and magnifies, this could have outsized ramifications on the housing sector of the economy, as mortgages becomes steadily more expensive relative to other credit-backed purchases of various durable goods.