The more influential rate when it comes to driving the broader economy, and struggling sectors like manufacturing and housing, is the 10-Year Treasury yield. Long-term financing, including mortgages, is tied closely to this rate. When the 10-Year yield falls, mortgage rates follow. When it rises, so do borrowing costs.
We saw this dynamic in 2021, when the 10-Year yield dropped below 1% and mortgage rates hovered near 3%. That environment fueled a surge in home purchases and refinancing, leaving a large share of American homeowners with mortgages under 4%. That’s one reason supply in the housing market has remained tight; you’re less likely to sell and trade up or down when it means replacing a 3% mortgage with a 6% one.
So, movements in the 10-Year yield will be instrumental in determining the fate of housing and other interest-sensitive industries like manufacturing.
A key driver of the 10-Year yield is expected inflation. Bondholders want to protect their purchasing power, so when inflation expectations rise, so do interest rates. We saw this clearly in 2022 and 2023, when inflation reached 40-year highs and the 10-Year yield climbed toward 5%. Mortgage rates peaked at 7.9% in October 2023.
As inflation cooled after the Fed’s rate hikes, the 10-Year yield began to drop, ending September 2024 at 3.75%. Mortgage rates followed suit, approaching 6%. The Fed then kicked off this latest cycle with a 50-basis-point (0.5%) cut to the Fed Funds rate in September 2024. But instead of continuing to fall, the 10-Year yield climbed again, reaching 4.8% by January 2025. Mortgage rates responded, nearing 7%.
The 10-Year yield briefly dipped below 4% following the latest employment report. When the economy weakens, investors anticipate lower inflation and flock to bonds, which drives yields down. That’s exactly what began to unfold after a string of weak jobs reports in July.
But following the September rate cut, the 10-Year began rising again. If yields continue upward, mortgage rates, which were inching closer to 6%, could reverse course and rise once more.
If the job market continues to weaken, we’ll likely see the 10-Year fall further, easing mortgage rates and providing support for housing. And if the economy does soften, which still seems likely, the Fed will continue to prioritize employment over inflation. That will bring additional rate cuts and downward pressure on yields.
However, if growth surprises to the upside — or if bond investors grow more anxious about fiscal deficits and persistent inflation — we’ll see the opposite: higher yields and renewed upward pressure on mortgage rates.
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