Why Mortgage Rates Don't Follow the Fed Rate

The Fed cuts rates. Mortgage rates go up. Wait, what?

Most people think mortgage rates follow the Federal Reserve. They don't — at least not directly.

Better Offers Inc (CA DRE #01212512) is a California mortgage broker. Here's what actually drives mortgage rates.

The Fed vs. Mortgage Rates

Federal Reserve controls: Federal Funds Rate (overnight lending between banks)

Mortgage rates track: 10-Year Treasury + Mortgage-Backed Securities (MBS) spread

They're related, but not the same.

What Actually Drives Mortgage Rates

1. The 10-Year Treasury Yield

This is the main driver.

When the 10-year Treasury yield rises → mortgage rates rise
When it falls → mortgage rates fall

Why? Mortgage-backed securities (bonds made up of bundled mortgages) compete with Treasuries for investor money.

2. Mortgage-Backed Securities (MBS) Spread

The spread = difference between 10-year Treasury and mortgage rates

Normal spread: 1.5-2.5%

Example:

• 10-year Treasury: 4.0%
• Normal spread: +2.0%
• Mortgage rate: 6.0%

Spread widens when:

• Economic uncertainty (investors demand higher returns)
• Prepayment risk increases
• Credit markets tighten

Spread narrows when:

• Economy is stable
• Demand for MBS is strong

3. Inflation Expectations

When inflation is expected to rise, Treasury yields rise (investors demand higher returns to offset inflation).

Higher Treasuries → higher mortgage rates.

4. Fed Policy (Indirect Effect)

The Fed does influence mortgage rates, but indirectly:

Fed raises rates →

• Slows economy
• Reduces inflation (eventually)
• 10-year Treasury may rise or fall (depends on inflation outlook)
• Mortgage rates follow Treasury movement

Fed cuts rates →

• Stimulates economy
• Inflation may rise
• 10-year Treasury may rise (if inflation expectations increase)
• Mortgage rates could go up (counterintuitive but happens)

Broker's Tip: The Fed controls short-term rates. Mortgage rates are long-term instruments tied to bond markets. They move based on investor expectations about the future, not Fed actions today.

Real-World Example: 2023

March 2023:

• Fed raised rates 0.25%
• Mortgage rates... dropped from 7.1% to 6.5%

Why?

• Banking crisis (SVB collapse)
• Investors fled to safety (bought Treasuries)
• Treasury yields dropped
• Mortgage rates followed

The Fed raised rates, but mortgages got cheaper.

Why the Disconnect Confuses People

Headlines say: "Fed cuts rates!"

People think: "Time to refinance!"

Reality: Mortgage rates may have already priced in the cut weeks ago.

Or: The cut signals economic weakness → inflation fears → Treasury yields rise → mortgage rates rise despite the Fed cut.

How to Actually Track Mortgage Rates

Ignore the Fed Funds Rate.

Watch:

1. 10-Year Treasury yield (google "10-year Treasury")
2. Mortgage-backed securities (FNMA 30-year MBS)
3. Inflation data (CPI, PCE)
4. Economic reports (jobs, GDP)

When 10-year Treasury drops 0.5% → mortgage rates drop ~0.5-0.75%

When Should You Lock Your Rate?

Don't try to time the market perfectly.

Lock when:

• You're comfortable with the rate
• You're close to closing (30-45 days out)
• Markets are volatile (rates swinging daily)

Float when:

• You're early in the process (60+ days to close)
• Rates are trending down
• You can handle the risk of rates going up

See when to lock your rate

Monitor Rates Daily

Get rate alerts and lock when you're ready.

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Better Offers Inc | CA DRE #01212512