How Interest Rates Are Determined - Eschewing the Myth

It is important to remember that, contrary to commom opinion, it is mortggage backed securities and not the 10 year Treasury which determine interest rates.  Each 50 basis point swing in the Fannie Mae 4.5% coupon 30 year bond will increase the interest rate exactly .125%.  The reason we are using the 4.5% coupon is that when the mortgages are packaged and sold to Fannie Mae and then to Wall Street about .75% in fees and commissions is added to the rate.  Doing the math, the rate becomes 5.25% which is closest to the rates we have today.  Broader swings of the market cause us to change the coupon we use.