How bonds affect mortgage rates

If you’re looking to buy or refinance a home, paying attention to the bond market can help you be ready when opportunity presents itself. Your mortgage rate is determined in part by bond market conditions. Bonds and mortgage rates have an inverse relationship. When bond prices are up, mortgage rates are down. This also means mortgage rates rise when bond prices are down.

How bond loans work

Bonds are long-term, low-risk loans. Sometimes cities sell municipal bonds to raise money for infrastructure like schools or roads, but mortgages are more impacted by mortgage-backed securities (MBS) and U.S. Treasury bonds. Mortgage-backed securities are groups of loans that have been packaged together as a financial product which can be sold on the secondary market.

A U.S. Treasury bond is a loan you make to the government and the government pays you back over time with interest. Both investments have fixed rates. The interest rate isn’t as high as you could earn by playing the stock market, but there’s a guaranteed return.

When are Treasury bond rates determined?

Auctions are held where people can bid for all manner of securities and different terms. In this way, the market sets the rates at which they’re willing to hold government debt for a promised return. There are regular Treasury auctions based on the term and type of security. Those interested in participating in auctions or looking for government savings bonds can check out the Treasury Direct website.

How bonds and mortgage rates are related

The link between mortgages and bonds stems from the competition from investments. Both bonds and mortgage-backed securities are appealing to similar types of investors, typically those looking for stable returns with some degree of safety.

While the size of the loans can vary, it’s important to know is that loans with similar characteristics are grouped together for mortgage investors. For example, an MBS might be made up of loans based on primary residences for borrowers with credit scores of 680 or better. The interest rate received by those mortgage borrowers is based on the MBS yield.

While an individual MBS determines your rate, the floor for MBS investing is historically based on the 10-year treasury yield. It’s sometimes more and sometimes less, but the spread between the 10-year U.S. Treasury and the 30-year fixed rate mortgage is often in the range of 2% – 2.5%. The difference is referred to as the spread.

What happens when bonds fluctuate

The fluctuations in bond rates impact those looking to buy or refinance homes because they have a direct impact on the mortgage rate you receive no matter the term. As an example, during COVID-19, concerns about far-reaching economic impacts had people flocking to bonds for the guaranteed return. Mortgage rates fell as low as 2.65% the week of January 7, 2021.

On the other hand, bond yields are also extremely impacted by inflation. Because bonds typically offer a fixed rate of return that isn’t tied to inflation in most cases, if prices rise too fast, you’re losing money relative to how much costs have risen. As the concern about inflation has risen the last several years, bond yields have risen with it, up to 6.64% for the week of April 3, 2025, in the Freddie Mac Primary Mortgage Market Survey.

Which mortgage rates are affected by bonds?

Fixed-rate mortgages have interest rates that remain constant throughout the life of the loan. Meanwhile, adjustable-rate mortgages (ARMs) can adjust annually or semi-annually after a fixed period lasting a number of years at the beginning of the term. But regardless of which mortgage you have, the rates are impacted by the bond market:

• Fixed rates: With a fixed rate, your mortgage is going be some amount higher than a long-term Treasury yield curve. For that 30-year fixed, the Treasury of choice for comparison by investors is typically the 10-year U.S. Treasury.
• Adjustable rates: The initial rates on ARMs are based on the same long-term yield curves because they usually have 30-year terms. Once the fixed period is up, the adjustments are also often tied to Treasuries as Treasury yields serve as the basis for the Secured Overnight Financing Rate and Constant Maturity Treasury indexes that are the basis for conventional, FHA, and VA ARMs.

The bottom line: Understand the relationship between bonds and mortgage rates

You can’t control market movement when you’re looking for a house or trying to refinance. Understanding the way interest rates move can give you an idea of the conditions that lead to favorable rates so you can make a shrewd move when the time comes. When bond demand goes up, mortgage rates tend to come down. The opposite happens if people are more concerned about inflation or interested in stocks.

If this has left you feeling more sure of yourself and ready to get started, you can apply online.