Mortgage rates have begun to decline, which is what you want. Will it last, though? How low are they going to go?
According to experts, rates could drop even further in the upcoming year. The yield on the 10-year Treasury is another important indicator to keep an eye on. Here’s why.
The Link Between Mortgage Rates and the 10-Year Treasury Yield
The 10-year treasury yield, a commonly watched benchmark for long-term interest rates, has been closely correlated with the 30-year fixed mortgage rate for more than 50 years (see graph below):
Mortgage rates typically rise in tandem with the treasury yield. Additionally, mortgage rates usually decrease when the yield declines.
For more than half a century, this pattern has been consistent. It’s so predictable that experts consider a certain number to be typical for the difference between the two. Known as the spread, it typically averages 1.76 percentage points, or 176 basis points as it is sometimes referred to.
The Spread Is Shrinking
However, that spread has been significantly larger than usual over the last two years. Why? Consider the spread as a gauge of market apprehension. The gap widens more than usual when there is persistent economic uncertainty. This is among the factors contributing to the abnormally high mortgage rates of the last several years.
However, this is a sign of hope. That spread is beginning to close as the future becomes more apparent, despite the fact that there is still some residual economic uncertainty (see graph below):
And that makes it possible for mortgage rates to drop even further. According to a recent Redfin article:
Mortgage rates decrease when the mortgage spread decreases. Mortgage rates may drop even further if the spread keeps getting smaller.
The 10-Year Treasury Yield Is Expected To Decline
But it’s more than just the spread. In the upcoming months, it is also anticipated that the 10-year Treasury yield will decline. Therefore, two major factors that could push mortgage rates lower into the upcoming year are a declining yield and a narrowing spread.
Due in large part to this long-term relationship, experts currently predict that mortgage rates will decline, with a remote chance that they will reach the upper fives by the end of the following year.
This is how it operates. At the time this article is being written, the yield on the 10-year Treasury is approximately 4.09%. The average spread is 1.76%. Mortgage rates should be approximately 5.85% after that.
However, keep in mind that everything is subject to change as the economy does. Additionally, be aware that there will undoubtedly be ups and downs during the journey.
The future course of the economy, labor market, inflation, and other factors will determine how these dynamics develop. However, it is currently anticipated that mortgage rates will gradually decline in 2026. And things are currently beginning to go in the right direction.
Conclusion:
It can be very difficult to keep up with all of these changes. This is why it’s important to have a knowledgeable agent or lender on your side. They will take care of the heavy lifting.
Speak with a reliable lender or agent who can keep you informed and assist you in making your next move if you would like real-time mortgage rate updates.