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10-year Treasury yields top 2%. Here’s what that means for mortgage rates

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Climbing mortgage rates are being driven by rising yields on 10-year Treasury notes, which today rose above 2 percent.

It’s the highest level for this key bond since July 2019, and signals, among other things, that new mortgages are likely to keep getting pricier. Mortgage rates tend to track the 10-year bond yield.

“The higher 10-year Treasury yields go, the higher mortgage rates go as well,” said Greg McBride, Bankrate’s chief financial analyst. “A 10-year Treasury yield above 2 percent means 30-year fixed mortgage rates working their way close to the 4 percent threshold.”

Mortgage rates bottomed out during the depths of the coronavirus pandemic as the Federal Reserve pulled whatever levers it could to keep the economy afloat.

As the Fed returns to pre-pandemic monetary policy, yields and rates are likely to keep going up, at least for a while. Thursday’s consumer price index report showed that inflation hit 7.5 percent, a 40-year high, which likely contributed to rising 10-year Treasury rates.

While 2 percent may seem like a significant threshold, Ken Johnson, a real estate economist at Florida Atlantic University cautioned against reading too much into the number.

“The 2 percent threshold is a psychological barrier not a mechanical barrier. There is no reason, however, that a 2 percent yield on 10-year Treasury notes is any different than 1.90 percent or 2.10 percent,” he said. “Historically, 30-year mortgage rates have ranged between 1.70 percent and 2 percent above 10-year Treasury yields. The 2 percent barrier will get a lot of press but it will not impact rates any differently than other 10-year Treasury yield levels.

For homebuyers and owners looking to refinance, a 2 percent Treasury yield likely means higher mortgage interest rates and therefore, higher monthly payments. But, even if mortgage rates reach 4 percent in the coming days, it’s still cheap money by historical standards

How does the Federal Reserve affect mortgage rates?

Although the Fed does not directly set mortgage rates, its actions and policies do affect how much you pay for your home loan.

That’s because the federal funds rate, which the central bank does set, affects how much it costs for banks to borrow money from each other. That, in turn, influences how much they’re willing to pay in interest on other financial products. For a fuller explanation, read Bankrate’s primer on the Fed and mortgage rates.

The Fed’s decision to scale down on purchasing mortgage-backed securities also encourages lenders to charge higher interest on home loans.

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Written by
Zach Wichter
Mortgage reporter
Zach Wichter is a former mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.