The Myth - 10 Year Treasury Notes Set Mortgage Interest Rates

One of the questions I get most frequently is what is what are the current mortgage rates and if I watch the rate on the 10 Year Treasury Note will I know what is happening with mortgage rates. The answer is that although the rates on the 10 Year Treasury Note and mortgage rates tend to move is the same direction, the 10 Year Treasury Note does not directly affect mortgage rates.

So what makes mortgage rates rise and fall? The are a number of factors including but not limited to what the Federal Reserve is doing, the economy, inflation or fear of inflation, competing investments and foreign capital.

The greatest myth is that the Federal Reserve (the FED) controls mortgage interest rates. The truth is that the FED, through their most well-known policy tool, the Federal Funds rate, controls the overnight interest rate which banks charge each other when a bank needs to borrow money to meet end-of-day reserve requirements. Banks must have a certain amount of cash on hand when the books close at the end of the day. Those funds can be borrowed from another bank at the Federal Funds rate. The rate is actually the rate the FED suggests, the actual rate is negotiated between the borrowing and lending banks. The Federal Funds rate is the rate that makes the news every time it is moved. The movement of the Federal Funds rate does not directly affect the movement in mortgage interest rates. The have been many occasions when the mortgage interest rates have moved in the opposite direction of the Federal Funds rate.

So why do many people believe the 10 Year Treasury Note is a good way to track what is happening with mortgage interest rates. One reason may be that even though most fixed rate mortgages are written for 30 years, the majority of mortgage loans are paid off in less than 10 years  because the property is sold or the loan is refinanced. For this reason many people have believed that the 10 Year Treasury Note is guide to mortgage rates.

Recent events have debunked the myth that the 10 Year Treasury Note tells you what is happening with mortgage rates. Mortgage Backed Securties and Treasure Notes are traded in basis points. 100 basis points equals 1 percent. On the morning of October 14,2008 Mortgage Backed Securities had improved by 28 basis points while at the same time the 10 Year Treasury Note had declined by 106 basis points. The net difference was over 1.25%. And in the past 24 hours, the 10 Year Treasury Note has risen by 285 basis points while the Mortgage Backed Securities have risen by only 12 basis points. a difference of 273 basis points or almost 2.75%

Hopefully, with all the bad economic news that has been released recently, mortgage interest rates will respond by moving lower. If you are thinking about buying a home or refinancing your current loan you need to be aware of the movements in interest rates. Last January interest rates hit their lows for the year. The lowest rate was only available for about four hours before it moved back up. Although this was very unusual, it shows the importance of keeping current on what is happening with interest rates.

The Daily Market Report on my web site tracks the current trends for mortgage interest rates. You can find the Daily Market Report on my web site at www.Mtg-Info.net/DailyMarketReport.

Call me with any questions you have concerning the current market.