Mortgage Rates Are Finally Falling. Here’s Why They Can Move Fast.

Anxious home buyers are sometimes advised to watch out for the Federal Reserve’s next move. In reality it is the bond market that bears watching closest, and not just plain old Treasurys.

Long-term bond yields have been drifting lower because of a host of factors, including expectations that the Fed will soon start cutting interest rates but also rising risks of a recession.

The corresponding move in mortgage rates has been stunning: A daily tracker by Mortgage News Daily reported that 30-year fixed rates hit their lowest level since 2024 earlier this month and were at 6.29% this past Friday.

And on the Friday of the most recent government jobs report, which showed August hiring at a far slower-than-anticipated pace, 10-year Treasury yields fell 0.09 percentage point. Mortgage News Daily’s 30-year fixed-rate tracker dropped by 0.16 point that day.

Plus, the spread between benchmark Treasury yields and mortgage bonds—a key input into mortgage rates—has also compressed sharply in recent days, according to data from Bank of America analysts.

Some of the rapid move in mortgage rates on offer is attributable to what Mortgage News Daily’s chief operating officer, Matt Graham, described recently as “the arcane underpinnings” of the market for bonds that pool lots of mortgage loans, known as mortgage-backed securities.

Standard 30-year fixed-rate mortgage loans, such as those guaranteed by Fannie Mae or Freddie Mac, are often sold off by the originating bank or lender into the mortgage-bond market. These standardized bonds come in half-point buckets, or coupon levels. A bond at 6%, then one at 5.5%, and so on.

The upshot, according to Graham, is that “rates can drop more quickly than normal as they approach the upper limits of the next lower bucket.”

What happens when expectations of future interest rates start to drop rapidly is that bond investors become willing to pay more for the next lower-coupon bucket. And mortgage originators in turn see better pricing in the market for loans that are now in demand for that lower bucket.

This is because mortgages at higher rates are more likely to get refinanced and paid back early, creating a risk for bondholders that they will have to reinvest their money at lower rates. In other words, they would rather have a bond with a lower payout but longer lifespan.