The Federal Reserve has created 18 months of rate hikes to calm inflation, but the real challenge for the property market has been the continuing high 10-year bond yield.
These bonds are viewed as one of the safest possible investments and an indicator of investor confidence in the economy, so the yield will impact mortgage costs until it returns to historic norms.
When the yield is high, so are mortgage costs.
Investors track Treasury bond yields (or rates) for several reasons. Primarily, the Government pays out yields as interest for borrowing money by selling 10-year bonds. It sells these bonds in an auction, and the bidding sets the yield level.
When it’s low, it means investors are down on America’s economic prospects and happy to stow their money in a safe but low-yield bond.
The investor community believes it can make more money with higher-risk bets on the likes of Amazon, Google, Tesla and WalMart. So, they snub the 10-year Treasury bonds.
To attract these investors, the yield rises. And that’s bad news for mortgage costs.
In late 2020-21, yields were at historic lows of around 0.5%. That’s when mortgages were at their cheapest. The yield is currently bouncing around 4.5% and lending rates have crept towards 8%, the highest for 22 years.
There have been recent calls for the Federal Reserve to start buying mortgage securities to unlock the market.
This is expected to ease the pain for first-time buyers and entice into the market potential sellers who have been holding on to their low mortgage deals.
How America responds to the challenge given it affects so many families will be interesting, especially in an election year.