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Mortgage rates have fallen today to the lowest level seen this year, due to a dropping yield on the 10-year Treasury bond. Investors are flocking to Treasurys after last week’s jobs report boosted concerns of a sluggish U.S. economy and a possible recession. The rate on a 30-year fixed-rate conventional mortgage directly correlates with the yield on the 10-year Treasury, so when the Treasury yield falls, so do mortgage rates.
As of August 5, 2024, the average interest rate on the 30-year fixed-rate mortgage was 6.75 percent, according to Bankrate’s survey of the nation’s largest lenders. The yield on the 10-year Treasury dropped below 3.7 percent, the lowest it’s been since May 2023.
Money tip: The difference between the yield on the 10-year Treasury and the 30-year mortgage rate is referred to as a “spread.” Historically, this spread has been a difference of 1.5 percent to 2 percent, but it’s grown in recent years to closer to 3 percent.
“After months of dawdling at or above the 7 percent mark, mortgage rates are reversing sharply,” says Greg McBride, CFA, chief financial analyst for Bankrate.
Higher unemployment rates bring lower mortgage rates
The U.S. Department of Labor jobs report, released last Friday, showed unemployment rising to 4.3 percent — the highest it’s been since the onset of the COVID-19 pandemic. This news has triggered a major market sell-off of riskier investments and a migration toward more secure vehicles, such as U.S. Treasury bonds. While this news is causing the stock market to drop, it’s also causing mortgage rates to decline, giving borrowers a window of opportunity.
“The market is moving ahead of the Fed, bringing down longer-term rates including those for mortgages, which should lead to both more home purchases and a pickup in refinance activity,” says Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association.
“If you took out a mortgage at a rate above 7 percent, the refinancing door has swung open,” says McBride. “If you have an adjustable rate mortgage you’re looking to get out of, this is your chance. Mortgage rates are likely to fall further in the months ahead, but there are no guarantees and current rates are a bird in the hand for prospective borrowers.”
Bankrate insights
Will the Fed respond with a rate cut?
Last week’s Fed meeting concluded with the Federal Open Market Committee’s voting to continue holding their key benchmark rate at 5.25-5.5 percent — a 22-year high — for the eighth consecutive time.
“The Federal Reserve kept the federal funds target unchanged at its July meeting but hinted at a cut in September,” says Fratantoni. “The weakness in this [recent jobs] report, including the slower rate of wage growth and the higher unemployment rate, certainly supports such a cut, but the next inflation report needs to confirm that price growth is also slowing.”
While speaking of the possibility of a rate cut in September, Fed chair Jerome Powell reiterated the Federal Reserve’s dual mandate to keep both inflation and unemployment in check. The Fed meets next September 17 and 18. With high unemployment data causing tumult in the market, some economists are calling for a rate cut between meetings, but others are skeptical as to whether the Fed will actually take such a step.
“Not unless we see liquidity issues in financial markets,” says McBride. “114K new jobs and an overdue market correction won’t do it.”
The next Consumer Price Index report, detailing July’s inflation rate, is due out August 14. If inflation’s growth falls within the Fed’s target of 2 percent, a rate cut in September would be likely.
The Federal Reserve doesn’t set home loan rates outright. But its monetary policy moves do impact interest rates and, in turn, investors’ search for returns. When they seek out Treasurys, the bonds’ prices rise and their yields fall. Tied as they are to the 10-year Treasury, mortgage rates then follow suit.
