Have you ever heard of government bonds? What are they, and why do government bonds affect mortgage interest rates? Here’s why you need to track government bonds and what you need to know about them if you’re considering obtaining or refinancing a mortgage.
The average daily mortgage interest rate for Wednesday, January 10, 2024 is 6.78% for a 30 year fixed rate. The rate fell 0.02% from yesterday and 0.31% from December 2023. This information is sourced daily from correspondent, retail, and wholesale lenders located in the United States.
The average daily mortgage interest rate for Wednesday, January 10, 2024 is 6.05% for a 15 year fixed rate. The rate fell 0.02% from yesterday and 0.45% from December 2023. This information is sourced daily from correspondent, retail, and wholesale lenders located in the United States.
What are government bonds in the United States?
In simplest terms, when a business or corporation invests in a government bond, they are handing over money to the government in exchange for interest. In other words, it’s a loan to the government. Bonds are generally seen as a reliable way to earn interest in the long-term, as the government is stable enough to pay back its debts.
The United States government currently provides two types of bonds: EE Bonds and I Bonds. When bonds mature, the purchaser receives their initial investment plus the interest. It is also possible to sell them on a secondary market – an incentive for investment. Bonds are popular with individuals because they start at a $25 purchase level.
Government bonds are not the only types of bonds available, but here, we are only discussing Treasury bonds, as those are the types of bonds directly affecting average mortgage interest rates.
What do government bonds have to do with average mortgage interest rates?
Banks, credit unions, and other financial institutions monitor the 5-year bond yield and use that to influence their decisions on their rates for fixed-rate mortgages. Following that, they include a “risk premium,” or the padding between the bond rate and mortgage interest rate. This typically looks like 1-2 percent.
The relationship between bonds and mortgage rates are inverse; when bond prices go down, mortgage interest rates increase – and vice versa. Financial institutions pay close attention to the United States Treasury and the rates they set for bonds. It’s important to note that bond values only affect the average mortgage interest rates on fixed-rate loans.
For this reason, it’s a good idea to keep an eye out when the U.S. Treasury changes bond rates – for mortgage interest rates are likely to follow.