Mortgage Rates, the Fed & 10-Year Treasury Explained

If there's one question we hear again and again from clients, it's this:

“When will mortgage rates finally come back down?”

It's a fair question. For much of the past decade, especially in the years leading up to the pandemic, borrowing costs were at historic lows. Homebuyers could lock in 30-year fixed mortgage rates in the 3% range (or even lower), making real estate ownership more accessible and refinancing strategies extremely popular.

Fast forward to today, and we're in a very different world. Mortgage rates have doubled from their pre-pandemic lows, home affordability is strained, and many people are waiting on the sidelines for relief. But here's the truth: mortgage rates aren't just a random number set by banks; they're the result of a complex interplay between Federal Reserve policy, bond markets, and investor sentiment.

In this article, we'll break down how mortgage rates really work, why the 10-year and 30-year Treasury yields are critical benchmarks, and what indicators you should watch if you're wondering when rates may finally ease.

One of the biggest misconceptions about mortgage rates is that the Federal Reserve directly sets them. That's not exactly true.

The Fed controls the federal funds rate, the overnight rate that banks charge each other for short-term lending. This rate heavily influences short-term borrowing costs like credit cards, auto loans, and lines of credit.

Mortgage rates, on the other hand, are long-term rates. They are set by the market, not by the Fed. But the Fed's decisions still matter a lot. When the Fed raises (or lowers) the fed funds rate, it sends a signal about its view of the economy, inflation, and the likely direction of long-term interest rates.

Think of it like this:

• The Fed sets the weather forecast.
• The bond market adjusts its umbrella or sunglasses accordingly.
• Mortgage rates reflect the bond market's long-term outlook.

So if the Fed doesn't directly set mortgage rates, what does?

Enter the 10-year Treasury yield.

The U.S. 10-year Treasury note is considered one of the safest investments in the world. It serves as a benchmark for long-term lending because investors use it to gauge both inflation expectations and economic risk.

Here's the key:

• Mortgage investors want to earn a premium above what they could get by holding Treasuries.
• Historically, the 30-year fixed mortgage rate runs about 1.5% to 2% higher than the 10-year Treasury yield.

For example:

• In late 2019, the 10-year Treasury yield was around 1.9%, and average mortgage rates were roughly 3.75%.
• By late 2021, the 10-year was closer to 1.5%, and mortgage rates fell to nearly 3%.
• Today, with the 10-year hovering in the 4–4.5% range, mortgage rates are sitting near 6.5–7.5%.

This spread isn't perfectly fixed; it can widen or narrow depending on investor appetite, mortgage-backed securities demand, and overall risk perceptions. But the 10-year yield remains the single best guide to where mortgage rates are headed.

While the 10-year is the most closely watched benchmark, the 30-year Treasury yield also plays a role. Because mortgage loans are often repaid or refinanced within 30 years, the 10-year tends to be the closer proxy. But for lenders and investors, both Treasury benchmarks provide critical context.

In practice, the 10-year drives the conversation, while the 30-year provides additional color on long-term inflation and growth expectations.

To understand when mortgage rates might fall, it's helpful to know why they rose so dramatically after the pandemic.

Three key factors explain the surge:

• Post-pandemic supply chain issues, fiscal stimulus, and surging demand drove inflation to multi-decade highs.
• Investors demanded higher yields to compensate for inflation risk.

• Starting in March 2022, the Fed raised rates at the fastest pace in 40 years.
• Even though the Fed wasn't directly raising mortgage rates, its actions pushed Treasury yields higher across the curve.

• Mortgage rates are tied to the MBS market.
• As the Fed wound down its purchases of mortgage bonds (a policy known as quantitative tightening), demand weakened, forcing lenders to raise rates further.

The result? Mortgage rates surged from around 3% in early 2022 to more than 7% in 2023, a move that stunned borrowers and froze much of the housing market.

Now to the question on everyone's mind: when will mortgage rates come down?

The honest answer: not anytime soon.

Here's why:

• Inflation is cooling, but not enough to justify ultra-low rates.
• The Fed has signaled it will keep rates “higher for longer” to ensure inflation doesn't resurge.
• Global demand for Treasuries isn't what it was in the 2010s, when deflation risk pushed yields abnormally low.

That said, we do expect mortgage rates to decline as inflation continues to ease gradually and the Fed eventually cuts rates. Instead of 3%, though, a more realistic target may be:

• 5.5% to 6% in the next 12–24 months if inflation trends lower.
• Below 5% only if we see a significant economic slowdown or recession.

If you're waiting for mortgage relief, keep your eyes on these three indicators:

• Think of it as the heartbeat of mortgage rates.
• If the 10-year falls below 4%, expect mortgage rates to follow.

• The Fed needs to see inflation sustainably back near 2% before loosening policy.
• Lower inflation = lower Treasury yields = lower mortgage rates.

• Watch the Fed's language around “rate cuts” and “economic outlook.”
• Even the hint of a dovish pivot can push yields and mortgage rates lower.

For homebuyers wondering if we'll ever return to the “good old days” of 3% mortgage rates, the reality is sobering:

• Those ultra-low rates were the product of extraordinary circumstances—global deflationary pressures, massive central bank intervention, and a once-in-a-century pandemic.
• Unless we see another severe economic crisis, it's unlikely we'll return to those levels anytime soon.

Instead, think in terms of relative affordability. A 5–6% mortgage rate may feel high compared to 2021, but it's much lower than the double-digit rates many homeowners faced in the 1980s.

For homebuyers, this environment can feel discouraging. But perspective helps:

• A 6.5% mortgage rate may feel high compared to 2021, but it's still historically lower than the double-digit rates of the past.
• If you can afford the payment today, you can always refinance later if rates drop.

For investors, mortgage rates also ripple into broader markets:

• Higher rates slow housing demand and construction.
• They affect valuations of real estate investment trusts (REITs) and other income-producing assets.
• They shape broader economic growth and, therefore, stock market performance.

Mortgage rates may feel like a mystery, but once you understand the chain of influence—from Fed policy → Treasury yields → mortgage-backed securities → your mortgage rate—the picture becomes much clearer.

Will we ever get back to the rock-bottom 3% mortgages of the pre-pandemic years? Probably not in the near future. But we will see relief as inflation cools and Treasury yields adjust.

At VIP Wealth Advisors, we believe the best strategy isn't waiting for the “perfect rate,” but rather making intelligent, informed financial decisions in the environment we have today. If and when rates fall, refinancing or restructuring is always an option, but waiting indefinitely often costs more than acting strategically now.