Long-term bond yields have been drifting lower on expectations of Fed rate cuts and growing recession risks. That drop has pulled mortgage rates sharply down. Mortgage News Daily reported that 30-year fixed mortgage rates hit their lowest level since 2024 earlier this month and stood at 6.29% this past Friday.
On the day of the August jobs report, which showed weaker-than-expected hiring, 10-year Treasury yields fell 0.09 percentage point. Mortgage News Daily’s 30-year fixed-rate tracker dropped by 0.16 point the same day. Bank of America analysts also noted that the spread between benchmark Treasury yields and mortgage bonds has compressed quickly in recent weeks, further easing mortgage rates.
Mortgage rates are finally falling, but they can move fast
Matt Graham, Chief Operating Officer of Mortgage News Daily, described “the arcane underpinnings” of the mortgage-backed securities (MBS) market as a contributing factor in the decision. Typically, lenders sell 30-year fixed-rate mortgages into MBS markets, including those backed by Freddie Mac or Fannie Mae. These bonds are traded in “coupon buckets” of half points, such as 6%, 5.5%, and 5%.
According to Graham, “rates can drop more quickly than normal as they approach the upper limits of the next lower bucket.” Because lower buckets of bonds are less likely to be refinanced early, investors purchase them when they anticipate a decline in interest rates. Better rates on loans that fit those lower buckets then benefit lenders.
Investors have been moving from the 5.5% coupon bucket, which covers loans between 5.75% and 6.625%, to the 5% coupon bucket, which covers loans between 5.25% and 6.125%, according to recent trading. That change has strengthened the decline in rates.
Additional technical factors may strengthen the trend. Some investors sell Treasurys to hedge mortgage bonds. In order to rebalance those hedges when rates decline, they might purchase Treasurys, which lowers yields and lowers mortgage rates.
Weak bank demand for mortgage bonds was one of the factors that kept mortgage rates high in recent years. Although analysts warn that the outcome is far from certain, buying may speed up and create a self-reinforcing loop if investors become more optimistic that long-term rates will continue to decline.
Obtaining a mortgage is rarely easy. However, in this instance, homebuyers have benefited from the complexity of the market.
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