Chart of the Day - Lower Rates Don't Always Means Lower Mortgage Rates

Today’s Chart of the Day was shared by my colleague, and fellow Portfolio Manger, Angie Parsons. It's a from Bloomberg article showing the changes in the short-term Fed funds rate, 30-year mortgage rates and 10-year Treasury rates since August 2024.

The Fed funds rate is a short-term rate that banks charge for lending excess cash overnight and is a key tool the uses Federal Reserve to manage the money supply.

The chart shows when the Fed cuts the Fed fund rate it doesn’t always lead to lower mortgage rates. This is because 30-year mortgage rates follow the longer term 10-year Treasury rate, which is determined by the market's longer-term expectations of inflation, economic growth, and consumer spending.

While 10-Year Treasury rates and mortgage rates tend to move in similar patterns, they have different risk profiles. Since mortgages have higher risks than Treasury bonds, they require a higher rate, which is historically 1.70% to 2.25% (2% as a rule of thumb) above the 10-year Treasury rate.