Yields on long-term bonds are rising due to persistent inflationary pressures, and experts say borrowing costs, especially for long-term fixed-rate loans such as mortgages, are likely to continue rising.
The yield on the 30-year U.S. Treasury bond fell to just below 5.3% on Tuesday after hitting a 19-year high of 5.323%. of 10 year treasury Yields, a key benchmark for fixed-rate mortgages and other long-term loans, are above 4.7%. By comparison, it was less than 4% before the start of the Iran war at the end of February.
US government bond yield
“The rise in bond yields on long-term bonds, such as the 30-year Treasury, is a clear signal of displeasure with continued high inflation in the future,” said Lawrence Yun, chief economist at the National Association of Realtors.
The annual rate of inflation, as measured by the Consumer Price Index, was 3.4% in July, well above the Federal Reserve’s 2% target. The annual inflation rate in January before the war was 2.4%.
Impact of bond yields on mortgage interest rates
Rising yields are already pushing up mortgage rates, since 15-year and 30-year fixed-rate mortgages typically track the Treasury rate. The average interest rate on a 30-year fixed-rate mortgage ended last week at 6.69% and was 6.75% as of Tuesday, according to Mortgage News Daily.
“The impact on mortgage rates is directly related to the rise in bond yields,” Yun said. “Regardless of Fed policy, higher inflation and higher overall long-term borrowing costs mean higher mortgage rates.”
He said consumers should not expect a significant drop in mortgage rates.
Last week’s “positive economic data provided only temporary relief,” said Jeff Dergrahian, LoanDepot’s chief investment officer and chief economist. He said high energy prices stemming from the Iran conflict remained “a significant part of the inflation picture.”
“Long-term bond investors may need more evidence that the economy is returning to a low-growth, low-inflation environment before the post-pandemic inflation cycle truly ends and yields on 10-year and 30-year bonds fall significantly,” Dergrahian said.
In the meantime, there are ways to offset today’s rate increases, experts say.
“Some people may want to consider shorter-term mortgage rates, such as a 7-year (adjustable rate mortgage), which locks in fixed mortgage payments for the first seven years of the loan before readjusting,” Yun said. “These shorter term loans are ideal for people who are more certain they will be able to move to another home within the seven-year time frame.”
How bond yields affect other consumer loans
Interest rates on auto loans, credit cards, and student loans are also tied directly or indirectly to bond yields, meaning their monthly payments can also increase.
“Usually it’s an immediate pass-through to some consumer rates,” said Brett House, an economics professor at Columbia Business School. “For variable rate and some fixed rate loans, the interest rate resets daily.”
Concerns about the trajectory of the Fed’s interest rate policy have reignited, potentially weighing on variable interest rates on credit cards, which are closely tied to the prime rate and influence inflation expectations.
Car loan rates are also influenced by broader economic factors.
“While auto loan rates don’t move in isolation, sustained pressure on Treasury yields will inevitably drive up borrowing costs across the board,” said Jessica Caldwell, head of insights at Edmunds.
“The average annual interest rate for new cars is already around 7%, and for used cars it’s only 10.6%, so consumers are already paying a lot of attention,” he said. “If interest rates remain elevated due to rising bond yields, auto lenders will have little choice but to maintain or even increase annual interest rates, further stretching consumers’ budgets.”
Federal student loan interest rates are fixed for the life of the loan, but based on the previous 10-year Treasury auction in May, interest rates for new borrowers increased over the next year.
“Of course, the higher borrowing costs are to combat inflation, but it could be a double whammy for consumers,” said Ted Rothman, chief consumer finance analyst at Money Management International, a nonprofit credit counseling agency. “When prices are high and borrowing costs are high like they are now, it feels like you’re being squeezed from all sides.”
