Orion’s brokers know that the Federal Reserve controls the rates at which banks loan money to each other overnight, known as the fed funds rate. But brokers also know that mortgages have a much longer lifespan, and as a result they most closely track 5-year or 10-year U.S. Treasury notes, debt issued by the U.S. government and traded by investors in the bond market. And the prices of those are based on investor expectations. So, despite the Fed cutting rates last week, longer term rates rose.

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If investors expect inflation to be higher, for example, investors will want higher yields, so their investments don't lose value. It’s also the case that when inflation goes higher, the risk that interest-paying investments will lose value makes their prices decline. Bond prices decline when yields rise, and vice versa.

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Sometimes our brokers are asked, “Why are mortgage rates higher than bond yields?” While mortgages go in the same direction as the bond market, there is still a big “spread,” or difference between the two. Currently 30-year fixed-rate mortgages are 6.75-7.25, whereas the yield on the 10-year risk free Treasury note is around 4.50.

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Mortgages can pay off early, unlike Treasury securities. Also, mortgages are much riskier investments than debt issued by the government of the largest economy in the world. Individual homeowners can and do default regularly. Mortgages are also riskier because homeowners have the ability to refinance whenever they want, for any reason, with no penalty. Investors and institutions that buy mortgages and mortgage bonds have no guarantee that they’ll be able to count on constant cashflows from those financial products, so they demand more yield (and lower prices) to buy them.

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But mortgage rates aren’t even staying the same. They’re rising. In short, that's because risks are rising. The U.S. Fed has made significant progress in taming runaway inflation, but finally touching its 2% target will be hard. Policy makers acknowledged as much Wednesday when they forecast fewer rate cuts in 2025 than previously expected. "Inflation has been moving sideways," Fed Chair Jerome Powell said at a news conference, adding that achieving the goal of 2%inflation has "kind of fallen apart as we approach the end of the year."

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There’s littlereason to expect the bond market to pick up, e.g., prices to go up, and ratesgo down. There is concern about the debt and the deficit, but also, we are inan environment where economic growth is looking like it's going to remainstronger. And that requires a higher natural rate of natural interest rates.

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Mortgages, meanwhile, have their own concerns: with rates for home loans having been so elevated for such an extended period over the past two years, investors have every reason to expect more prepayment risk than usual. No one wants an 8percent mortgage if they can refi and obtain 6.75. Of course, rates fluctuate every day, so check in with an Orion AE on the latest!