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How Do Bonds Affect Mortgage Interest Rates?

By Eric Goodwill

The rise and fall of mortgage interest rates is a confusing subject for the average person. There are many factors that collude to produce a rising or falling interest rate. All of these factors can seem incomprehensible to first-time homebuyers and established borrowers alike. Taking into account all the relevant circumstances surrounding mortgages, bonds issued by the U.S. Treasury are one of the most reliable indicators of mortgage interest rates.

How Bonds And Mortgages Are Similar Yet Different

The thing about bonds and mortgages is that while one is guaranteed to be paid back, the other is not. Bonds are backed by the full faith and credit of the federal government, and as such are guaranteed to be paid back by the time of maturity. Mortgages are not guaranteed to be paid back, however. This makes them riskier than bonds.

Investors are attracted by both bonds and mortgages, however, because they are largely designed for the same market. Unlike bonds, mortgages can be repackaged and sold as mortgage-backed securities, or MBS. MBS are sold through the secondary mortgage market for investors. Since bonds and mortgages are attractive to the same market, savvy investors use bond yields to ballpark mortgage rates for the immediate future.

How Bonds Are Used To Gauge Mortgage Rates

Bond investors commonly use a spread of one hundred and seventy basis points, or 1.7% above the current yield. So if bond yields were at precisely 5.00, the 1.7% range would put mortgage interest rates at 5.7% for the time being. Note that this is not a rigorously accurate measure of mortgage interest rates, but a rough guesstimate. MBS could rise by many basis points higher or fall by many basis points lower, depending on various market factors and conditions. Bonds are a good probability guide, but not a pinpoint accuracy gauge.

Related posts:

1. How Do Treasury Bonds Affect Mortgage Rates?
2. Do Declining Bond Prices Cause Mortgage Rates To Rise?
3. How Do Mortgage Interest Rates Affect Bonds?
4. Why Causes Changes in Mortgage Interest Rates?
5. What Causes Mortgage Rates To Change?