Why Are Mortgage Rates Rising?

By John Lyons

John Lyons, a distinguished broker associate at Baird & Warner, has carved a niche in the Chicago real estate market with his comprehensive, client-first approach. With over $130 million in career sales, Lyons has a proven track record in assisting a diverse range of clients, including luxury home buyers, first-time buyers, sellers looking to move up, and investors.

You’ve probably heard people asking why mortgage rates are going up even though the Federal Reserve is lowering interest rates. The answer may surprise you. It’s not about what the Fed is doing—it’s about something called the 10-year Treasury bond. Let me explain.

What does the Federal Reserve do? The Federal Reserve, or “the Fed,” controls the federal funds rate. This is the interest rate banks charge each other to borrow money overnight. The Fed uses this rate to help control short-term borrowing, like credit card debt or car loans. But here’s the thing: the Fed’s actions don’t directly affect mortgage rates.

Mortgage rates are actually influenced by the 10-year Treasury bond, not the Fed’s rate. The 10-year Treasury bond is like a loan to the U.S. government that lasts for 10 years. When investors buy these bonds, it’s because they trust the government to pay them back with interest. The yield, or interest rate, on this bond sets the tone for long-term borrowing costs, like mortgages.

Why are mortgage rates going up? It all comes down to what investors are doing with their money. The U.S. government has a huge amount of debt, and inflation is rising. When investors believe inflation will keep climbing, they start looking for ways to grow their money faster than inflation. This means they invest in things like stocks, real estate, or other assets instead of Treasury bonds

When investors sell their 10-year Treasury bonds, the yield goes up. When the yield goes up, mortgage rates go up, too. This is exactly what’s happening right now.

The Fed’s role in the past. Back in 2020 and 2021, the Fed stepped in and bought a lot of 10-year Treasury bonds. This helped keep the yield low, and mortgage rates stayed low as a result. But the Fed isn’t buying bonds like that anymore. Unless they step back in and buy more bonds, mortgage rates are likely to stay high or even rise further.

So, the next time you hear someone say, “Why are mortgage rates rising when the Fed is lowering rates?” you’ll know the answer. It’s not about the Fed’s short-term moves. It’s about the 10-year Treasury bond and what investors are doing with their money. Mortgage rates are determined by the bond market, not the Fed. Right now, investors think there are better places for their money than the 10-year Treasury bonds. If you’re looking for ways to lower your mortgage rate or better understand what’s going on, feel free to call or text me at (773) 558-7133.