Mortgage lenders watch various indicators when they determine what rates to charge for their mortgages, but one indicator seems to stand out from all the rest in the minds of most mortgage lenders—the yield on the 10-year Treasury note.
[VIDEO] Mortgage Rates and the 10-Year Yield
Mortgage lenders aren’t really that concerned with what the actual rate they charge for mortgages. What they care about is ensuring that the rate they charge provides them with a nice profit above what they could have received if they had invested their money in 10-year Treasury notes instead.
Actually, lenders like Citigroup (NYSE: C), Wells Fargo (NYSE: WFC) and JPMorgan Chase (NYSE: JPM) prefer to see mortgage rates falling because falling mortgage rates typically lead to a wave of mortgage refinancing—which is extremely profitable for the lenders.
Why Mortgage Rates Fall
Mortgage rates fall because the following three things are happen:
1. The Federal Reserve is engaging in quantitative easing to lower longer-term interest rates by pushing down yields at the far end of the yield curve.
2. Quantitative easing is pushing down yields at the far end of the yield curve—like the yield on the 10-year Treasury (: $TREASURE10Y).
3. Mortgage lenders are lowering their mortgage rates to stay in line with the yield on the 10-year Treasury note.
Image courtesy Jeff Keen.