The bond market, which includes Treasury notes, has experienced volatility this year as a result of Trump administration tariffs on foreign imports. That volatility caused a surge in 10-year Treasury note yields, according to The New York Times.
Because 10-year Treasury yields serve as a benchmark for mortgage rates, mortgage rates also increased — bad news for anyone hoping to refinance their mortgage.
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Here’s what this means for your wallet and your mortgage refinancing plans.
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What Is a Treasury Note and How Does It Affect Mortgage Refinance Rates?
A Treasury note is a medium-term debt instrument used by the U.S. government to raise cash. The government pays you the note’s face value, called the par value, plus interest, when the note matures.
The interest rate is called the coupon rate. It’s a fixed rate of return that’s set when you buy the bond at auction on the Treasury Direct website. But it’s not necessarily the return you earn on your Treasury notes if you trade them on the open (secondary) market.
When economic conditions and events make investors skittish about investing in a medium-term government security like a 10-year Treasury, they might demand a premium on the interest rate. That premium offsets the risk of investing in the 10-year note rather than a shorter term one, such as a one- or two-year note, per Fannie Mae.
Tariffs have had that effect. But the coupon rate is fixed, so to get the premium, investors buy the bonds at less than face value. The lower bond price increases the yield to an amount that’s higher than the coupon rate.
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To understand how that works, imagine you went to TreasuryDirect.gov and paid $100 for a Treasury note with a face value of $100, and you got a coupon rate of 4.25%. You can calculate the yield by dividing the coupon rate by the market price — the price you paid for the bond:
4.25/100 = 0.045, which is 4.25 cents in interest per year and a yield of 4.25%.
But what happens if you get the bond on the secondary market, and the premium reduces the price of the bond to $98? The face value is still $100, and the coupon rate is still 4.25% of that. So you still get 4.25 cents of interest per year. But the yield changes because you paid less than face value.
4.25%/98 = 0.0434, or 4.34% yield.
The lower market price increased the yield.
Rates Could Fall by the End of the Year
Treasury note yields aren’t the only factor affecting mortgage rates. The federal funds rate, which is set by the Federal Reserve, and other economic factors also play a role.
Goldman Sachs and the Mortgage Bankers Association both expect to see slight decreases in the federal funds rate in the third quarter of this year, based on several economic indicators. That’s earlier than either previously had predicted.
The MBA also expects a 0.1% decrease in 10-year Treasury yields in the fourth quarter. If it’s right, waiting until the end of the year to refinance could get you a slightly lower interest rate on your mortgage refinance loan than you’d get if you were to refinance your mortgage today.
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This article originally appeared on GOBankingRates.com: Tariffs Are Driving Up 10-Year Treasury Yields — Why That’s Bad News for Refinancing Your Mortgage
