Ever wonder why your mortgage rate seems to jump around with news about government spending? This post breaks down one of the moving parts behind mortgage rates: treasury bonds and how investor appetite for them affects what you pay.

"I wish it were possible to obtain a single amendment to our Constitution. I mean an additional article, taking from the federal government the power of borrowing." -Thomas Jefferson

This is just one moving part of what affects rates, but it's an important one.

How the Government Borrows Money

When the federal government needs to borrow money, it issues treasury bonds and notes.

These bonds and notes are issued at auctions, and they'll issue them in short and long terms: 2 year, 3 year, 5 year, 7 year, 10 year, 20 year, 30 year. They even issue shorter term bills like 4 week and 13 week terms.

Investment banks and other traders are supposed to buy them. There are about 24 banks that are literally obligated to show up and bid. There's a long list of bidders, and the auction isn't over until every single bond, note, or bill is sold.

Why Treasury Rates Matter for Your Mortgage

The reason treasury bonds and notes matter is because mortgages are packaged up into bonds and sold to investors too. So they're seen as similar investment vehicles, and the yield or rate for mortgages fluctuates almost in tandem with treasury rates.

The 10 year treasury is the one most tied to mortgage rates. There's a bit of a spread though. You'll see the 10 year around 4.6% today, and mortgage rates around 6.8%. That 2.2% difference is called the "spread" and it exists because mortgages carry the risk of early payoff or refinancing. Keep that in mind as I talk about treasury notes.

What Happens When the Government Spends More

So when the government spends a bunch, they need to borrow a bunch. They do that by putting up treasury notes for auction.

Investors say, "I'll buy some of these 3 year bonds, but only if they come with a (insert number) percent interest rate."

That's the investor's bid: "I'll take it, but at this rate."

They sell these bonds to the person who will take it at the lowest yield first, then they work down the list until it's sold.

Here's Where It Hurts Rates

If more and more bonds get issued, investors get full of bonds and "lose their appetite."

When you hear "there wasn't much appetite for the 10 year at the auction," it means investors didn't want it.

It's like the Trunchbull forcing a kid to eat chocolate cake, and then asking him if he'd like more. "No thanks, I've had enough cake."

When they don't have much appetite for it, they'll say something like, "Fine, I'll take it, but at this much higher rate."

These 24 obligated investors are forced to show up and eat it, like Bruce Bogtrotter, but they can demand a higher yield.

That very last bid, the reluctant bidder who offered it higher, is the bid that establishes the yield for everybody.

Treasury rates go up. Mortgage rates go up.

So every time I read a headline that reminds me the government sends billions to another country, or the US spends billions on a war, my eye twitches a bit and I have to do that breathing technique where you hold your breath for 4 seconds and then exhale for 4 seconds.

This is just a piece of what drives rates. If you want to understand how rate changes actually affect what you can afford, my affordability calculator can help you see the real impact on your budget.

Quick Update on Inflation News

Let me give a quick update on the latest inflation news, since that's a big rate driver too.

  • Oil prices dropped this morning with recent headlines on strikes being paused in Iran.
  • Mortgages improved 35 bps this morning, and the 10 year has dropped to 4.628.
  • Year over year, national average rents are declining, which is a large chunk of inflation as well.
  • Coming Friday, we'll see the big jobs report.

If all of this rate talk has your head spinning and you want help figuring out what it actually means for your home search, grab a free planning session with me and we'll walk through it together.

Take care!

-Sam

Originally shared by u/SamTMortgageBroker in r/NewbHomebuyer — view the original thread.