Treasury bond yields spike. What it means for home mortgages
by Art Raymond deseret news · KSL.comKEY TAKEAWAYS
- Ten-year Treasury yields exceeded 5.3% Thursday, potentially influencing mortgage and loan rates.
- Freddie Mac reported a jump in 30-year mortgage rates to 7.28% from 7.03%.
- Rising Treasury yields also impact auto loans and credit card rates, which could affect households.
SALT LAKE CITY — Most people likely have at least heard of Treasury bonds, though purchases made by individual investors represent only a tiny fraction of the $1 trillion or so in bond transactions that happen every day in secondary markets.
On Thursday, 10-year Treasury yields briefly surpassed 5.3%, surpassing a mark not seen since 2002 before settling back to a rate of just over 5.25%. The yield rate on 10-year Treasury notes is significant because it impacts interest rates on some of the biggest expenses for household budget managers, like mortgages, auto loans and credit cards.
Bond yields have been on the rise thanks to a convergence of negative indicators for the economy, including persistent inflation, the ongoing Middle East conflict that has pushed consumer fuel prices into record territory and the national debt, which recently surpassed $40 trillion.
"We could see (bond) buyers come in effectively to take advantage of those yields, which would have the effect of causing them to go down, but also one of the things that has kept the volatility in those yields in the long end of the curve has been what's going on with oil, what's going on with inflation," Nomi Prins, founder of Prinsights Global, told CNBC's "Squawk Box Europe" on Thursday.
Home loan interest rates made the biggest one-week jump in four years, according to tracking by the Federal Home Loan Mortgage Corporation, better known as Freddie Mac. The average rate on a 30-year, fixed-rate mortgage was 7.28% on Thursday, up from 7.03% a week ago.
How does the bond market work?
One of the ways the federal government raises money to pay for things like social programs, military equipment and highways is by selling bonds, an investment security that is essentially an IOU agreement that will pay you interest over time. The more time you allow the government to take in paying back your investment, the more you can earn.
Interest rates and yields on those bonds, which are issued in a variety of terms ranging from a few months to 30 years, are variable, and in the case of the longer-term notes, determined in large part by investor demand.
Bond pricing and yields typically move in opposite directions and, generally speaking, positive investor sentiment about the direction of the economy sends bond prices higher and yields lower, while investor pessimism can drive bond prices down and yields higher. More simply put, Treasury bonds are less attractive as an investment vehicle when the prospects of the economy are looking dim.
How high bond yields impact household budgets
Since hitting a 12-month low of just over 6% in February, the average interest rate across the country on a 30-year fixed mortgage has been following a mostly upward trajectory, according to Freddie Mac. A sustained period of elevated yields on 10-year Treasury bonds could put further upward pressure on those borrowing costs.
Auto loan rates are also typically tied to the bond market, and experts are warning that the rates for consumers interested in buying a new or used automobile are likely to see those impacts in financing offers.
"Many auto loan interest rates move with the five-year or 10-year Treasury note. When bond yields are on the rise, we typically see auto loan interest rates move up as well," Patrick Manzi, chief economist for the National Automobile Dealers Association, a trade group that represents auto dealerships, told CNBC.
"Given the run-up in bond yields recently, we expect that auto loan rates will be increasing as well," Manzi said.
Credit card rates are set by issuing institutions based on a number of factors, including the applicant's personal credit history, but base rates are computed in part using the prime lending rate, which is tied to the Fed's benchmark rates. A report from Reuters notes that while rising long-term yields alone may not lift card rates right away, expectations of a more restrictive Fed can.
Rising Treasury yields increase the cost of credit for businesses as well. Reuters notes that higher borrowing costs can make capital-intensive projects such as data centers, energy infrastructure and industrial expansion less attractive, potentially curbing future investment and earnings growth. That is a particular concern for the tech sector, which is issuing record amounts of debt to finance AI-related projects.
The Key Takeaways for this article were generated with the assistance of large language models and reviewed by our editorial team. The article, itself, is solely human-written.