In recent weeks, mortgage rates have been on the rise according to the daily data provided by Mortgage News Daily (MND). The 30-year fixed-rate mortgage has experienced several spikes, reaching its highest level since July this year. Additionally, Freddie Mac’s weekly mortgage rates have also seen consecutive increases.
Despite the significant interest rate cuts by the Federal Reserve last month, why have mortgage rates surged rapidly? Chinese-American guest professor at Columbia Business School, Yu Lun Jing, recently analyzed the reasons behind this trend and made predictions about the Federal Reserve’s economic policies post-election in an interview with Epoch Times.
The 30-year fixed-rate mortgage recorded by MND jumped from 6.68% last Friday to 6.92% this Wednesday, hitting a peak not seen since July. Meanwhile, Freddie Mac’s weekly mortgage rates climbed from a low of 6.08% in September to 6.44% last Friday.
At the same time, as of Monday this week, the yields on 10-year and 30-year Treasury bonds have reached their highest levels since July 26th and 25th, respectively. The 10-year Treasury yield increased from a 52-week low of 3.622% on September 16 to 4.18%, a rise of 55.8 basis points. By Tuesday this week, U.S. bond yields had risen by about 60 basis points to 4.2%, reaching a high point since the Federal Reserve’s first interest rate cut in four years.
Since the Federal Reserve began raising interest rates in the first quarter of 2022, mortgage rates have more than doubled. Currently, market forecasts suggest that the central bank may start a rate-cutting cycle and could continue with marginal cuts in November and December.
What is the relationship between the Federal Reserve rate cuts and the increase in 10-year Treasury bond yields and mortgage rates?
Yu Lun Jing’s analysis suggests that Federal Reserve rate cuts do not directly lead to a decrease in mortgage rates, as mortgage rates are not determined by the federal funds rate. The recent uptick in mortgage rates reflects the market’s reassessment of the future economic outlook, particularly the uncertainty surrounding the Federal Reserve’s future policies.
Jing points out that mortgage rates are indeed closely related to the yields on 10-year Treasury bonds, as the latter reflect market expectations of long-term rates. “The 10-year Treasury bond is typically seen as a low-risk investment. When its yield rises, financing costs increase for lending institutions, leading to higher mortgage rates; conversely, when Treasury yields fall, mortgage rates also decrease accordingly.”
As for the recent rise in 10-year Treasury bond yields, Jing explains that this is primarily due to market expectations regarding the economic outlook and changes in Federal Reserve policies. Investors are cautious about inflation and economic growth prospects, and the market anticipates that the Federal Reserve will not make excessive additional rate cuts in the future, keeping Treasury yields at elevated levels.
It is widely predicted that the outcome of the U.S. elections will also impact the Federal Reserve’s economic policies. Pimco’s portfolio manager, Mike Cudzil, stated in an interview with MarketWatch that higher Treasury bond yields indicate a greater likelihood of Republican dominance in the elections, leading the market to favor the pro-stock market “red wave” view, which is expected to boost long-term yields.
Regarding the election results, different polls still show fierce competition. A client report from Barclays stock analysts cited by MarketWatch this Tuesday stated that Trump’s high-tariff plans and 10-year Treasury yields have been “consistently aligned with Trump’s winning probability.”
If Joe Biden wins, his policies are expected to align with the current Biden administration’s focus on stable economic growth and inflation control. Therefore, the Federal Reserve may moderately cut interest rates if economic conditions allow, without making drastic moves.
In the event of a Trump victory, although he may seek substantial rate cuts to stimulate the economy, the likelihood of significant rate cuts by the Federal Reserve remains low due to the high inflation risk.
“In general, regardless of the election outcome, radical rate cuts are unlikely to occur because the Federal Reserve needs to strike a balance between controlling inflation and promoting economic growth,” Jing remarked.