October 23, 2024: The Federal Reserve Cuts Rates—And Rates Go Up

For much of 2024, many homeowners held hopes to refinance their 7-8% mortgages into lower-interest loans as interest rates fell. Those hopes likely grew later in the summer as the Federal Reserve’s intention to lower its target interest rate became even more evident. Unfortunately for these homeowners, mortgage rates have not fallen since the Fed’s cut its target rate by 0.50% last month. Rather, longer-term interest rates, including 30-year mortgage rates, have risen.

A logical explanation exists to explain this apparent paradox. 30-year mortgages are priced in accord with long-term bond yields (such as the 10-Yr Treasury yield) rather than short-term bond yield such as the federal funds target rate. In the month leading up to the Federal Reserve’s cut the 10-Yr Treasury yield fell 0.26%; in the month following, the 10-Yr Treasury yield rose 0.47%. The primary explanation for this is straightforward: markets are forward-looking, and bond investors purchased 10-year Treasury bonds prior to September 18^th in anticipation of the Fed’s forthcoming rate cuts. Since that cut, strong economic data have lowered expectations for future rate cuts and helped send longer-term bond yields higher.

While frustrating for those hoping for lower mortgage rates, it is logical that 30-year mortgages reached their 12-month low on September 17^th—the day before the Fed’s rate cut.

Weekly Market Update: October 23, 2024