Mortgage-Backed Securities
Investing in mortgage-backed securities (MBS) can provide a stable and potentially profitable opportunity for investors. Learn More.
3 Min
If you’re in the process of buying a home, chances are you’re going to want to learn about treasury yields, interest rates, what bonds are, and how mortgage interest rates are affected by US treasury yield values.
Treasury yields are a type of bond. To keep it short, bonds are fixed income instruments that represent a loan made by an investor to a borrower (typically corporate or governmental). You can think of a bond as being like an I.O.U. between a lender and a borrower. As a loan, the details of a bond also include when the principal of the loan is due. It also includes the fixed or variable interest rate payments that’ll be made by the debt holder.
Truth be told, treasury bonds (also called T-bonds) are the safest of all the types of bonds, because they’re backed by the US government. That’s also why it directly affects the values of all other bonds—because investors use them as a way to compare values and assess risks when choosing how to invest their capital.
A general rule of thumb is that when treasury yield values go up, mortgage interest rates do too. That’s because the value of UMBSs begin to fall, and lenders want compensation for the greater risk.
Just today, on MBS Highway, the ten-year US treasury yield went up 10 bps (basis points). The thirty-year UMBS 2% (United Mortgage-Backed Securities) fell by over 100 bps—which is a whole 1%. And yes, you read that right—when the UMBS falls several bps, mortgage rates increase.
Another thing to keep in mind is that we're now in what’s called a bond market inversion. That’s when short term treasury bonds give you a greater return on your investment than longer term treasuries, such as the ten, twenty, or thirty-year treasuries.
While it’ll be short-lived, it’ll affect mortgage rates if you’re buying a home right now, so it’s important to lock in your rate before they climb higher.
If you’re currently buying a home with Rate Leaf, you know that’s we’ve been busy doing for you this week! Locking in your rate is essential to making sure you save as much money as possible before rates go up.
When there's not much demand, bond prices drop and treasury yields increase to compensate. That makes buying homes more expensive. Not to mention that when you have less buying power, you’re forced to buy cheaper homes.
So for future reference, know that when bond prices go up, that means you’re looking at lower mortgage rates. That’s what made the past year such an excellent time to refinance. Rates were very low almost all of 2020. In times of financial crisis, the US treasury yields tend to fall lower, which in turn caused mortgage rates to decrease.
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