Bonds had one of their best days yesterday in more than three years.
The 10-year yield plunged nearly 20 basis points, its biggest one-day drop since March 2023, even falling below 5% in the process.
You’d think mortgage rates would’ve had a stellar day as well, since the two move in relative lockstep.
Instead, rates on the 30-year fixed mortgage only came down about 0.125% or so, which equates to about $32 per month on the typical loan amount.
And even worse, yields are rising again today and so too will mortgage rates.
Why Didn’t Mortgage Rates Fall More?
Mortgage rates track the 10-year yield exceptionally well over time, but it’s not a perfect one-for-one ratio.
There’s always a gap between the two, known as the spread, which is basically the extra yield MBS investors (and lenders) demand to purchase a mortgage instead of a fully-guaranteed government Treasury.
They require this spread because mortgages can be prepaid, via a refinance, especially if rates drop in a short period.
When yields plunge as fast as they did yesterday, that spread tends to widen.
In other words, lenders didn’t pass along the full drop in bond yields, which may have left some folks disappointed.
It’s a pretty common phenomenon; lenders are slow to lower mortgage rates and quick to raise them.
The old adage is elevator up, stairs down.
Perhaps they don’t trust the move since a big one-day drop can reverse just as quickly, and nobody wants to stick their neck out, only to see rates rise the next day.
What Was Behind the Big Bond Rally?
It wasn’t good news on inflation, nor was it a positive development in the Middle East.
There was a classic flight to safety, driven by tech stocks getting hammered on renewed worries about how much money AI companies need to keep spending.
This has been a recurring theme lately, leading to the best mortgage rates in about a month.
When more investors pile into bonds, their yields (interest rates) fall. This is good for mortgage rates, but as noted, it’s only doing so much.
And if we zoom out, one could argue that AI spending actually pushed mortgage rates higher, so only some of it is being given back.
In addition, a rally that’s based on fear isn’t necessarily one that persists, so things could quickly shift back around again.
Oil Prices and War Already Pushing Mortgage Rates Back Up Again
Today is a different story, with bond yields (and mortgage rates) already creeping higher.
Oil is near a five-month high, and there are renewed worries about the war in the Middle East getting bigger.
That remains a problem for mortgage rates because higher oil prices can keep inflation hot, and hot inflation is exactly what pushed mortgage rates back up in the first place.
So again, if you want mortgage rates to go down meaningfully, you probably need oil to go down as well. And we need resolution in the Middle East.
Ultimately, it’s the same old story, where the thing that gave us a little relief yesterday is already being overshadowed by a bigger thing that’s been hurting mortgage rates since late February.
And because lenders are so slow to lower rates, we might never even see the improvement that perhaps should have been delivered if they were passing on the full discount.
But that kind of tells you how it all works. They can’t fully discount rates if the discount was only really ever good for a day.
Read on: Compare mortgage rates and monthly payments side by side with my mortgage rate calculator.
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