This morning my husband sent me an article from The Economist that delved into rising bond yields and their implications. As a mortgage broker, this sparked a lot of thoughts about how crucial it is to understand these dynamics, especially if you’re considering a fixed-rate mortgage. Since 93% of my clients choose fixed-rate options, staying informed about these trends is a must.
Bond Yields Are Rising
Almost everywhere, government bond yields are increasing significantly. For example, ten-year American Treasury bonds are nearing 5%, and German bunds have climbed to 2.6%, up from close to 2% in December. Meanwhile, British gilt yields recently hit nearly 5%, the highest they’ve been since 2008. Rising bond yields are a signal that borrowing costs are escalating, and this trend affects everything from government debt to mortgages.
If you’re shopping for a fixed-rate mortgage, the link to bond yields is direct. Mortgage rates are closely tied to government bond yields, which reflect the broader economic environment. As bond yields rise, so do fixed mortgage rates, impacting how much homebuyers can afford. So basically the best time to have gotten a mortgage in very recent history was November 2024 when I was able to hold rates in the 4.19 range. Now we are seeing 40-50 basis points higher on the 3 &5 year fixed and with bonds rasing I assume we will see the rates go higher. But what the heck? Everyone has been yammering on and on about rates dropping so Emily what is happening here???
Why Are Yields Rising?
There could be Several reasons for this trend, with inflation being a significant factor. Inflation’s persistent pressure has driven central banks to keep policy rates higher for longer. Investors demand higher bond yields to offset the erosion of purchasing power caused by inflation. Wage growth and low productivity growth are also contributing to inflationary concerns, creating an environment where central banks must act more hawkishly to control the situation.
Another factor driving up bond yields is greater uncertainty in the global economy. Concerns range from geopolitical tensions to the economic impacts of deglobalization and fluctuating fiscal policies. These uncertainties increase the "term premium" on long-term bonds—the extra yield investors require to compensate for potential risks.
How Does This Impact Fixed-Rate Mortgages?
For homeowners and prospective buyers, understanding the relationship between bond yields and mortgage rates is essential. Fixed-rate mortgages are priced based on bond yields, so any significant shift directly affects what borrowers will pay. For instance, the 30-year fixed-rate mortgage rate in the U.S. is hovering around 7% and has risen by a percentage point in just a few months.
This is why I stress the importance of being aware of market trends, especially for my clients who predominantly opt for fixed-rate products. Keeping an eye on bond yields can help you time your mortgage decision better and potentially save thousands over the term of your loan. It is also why I am on IG 2-3 times a month BEGGING people to complete a pre-approval because rates go up and down not just DOWN.
The Bigger Picture
Governments worldwide are running significant budget deficits, which require issuing more bonds. This increased supply of bonds puts downward pressure on bond prices and upward pressure on yields. Compounding this is quantitative tightening (QT), where central banks reduce their balance sheets by selling government bonds. This means private investors must absorb more bonds, further driving up yields.
While it’s difficult to predict exactly what will happen next, the underlying forces—rising fiscal deficits, inflation, and economic uncertainty—suggest that higher bond yields are here to stay, at least for the foreseeable future. For anyone considering a fixed-rate mortgage, this reinforces the need to stay informed and proactive about your financing options.
What Does This Mean for You?
If you’re thinking about securing a mortgage, especially a fixed rate, understanding bond yield trends can help you make better decisions. These rising yields might seem abstract, but they have a tangible impact on your monthly payments and long-term financial health. Do a pre-approval, have a rate held and buckle up - we are not quite out of the high rate environment yet. It is going to be a wild ride here in 2025. LFG!
Ready to chat about your goals? Visit www.emilycallme.com. Together, we’ll navigate these market changes and find the best mortgage strategy for you.
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