Last week, there was a significant shift in mortgage rates and the bond market, with concerns over the national debt and deficits becoming more prominent. A bond auction showed weak demand, leading to speculation in the media and markets about potential consequences for the U.S. due to its lack of fiscal discipline.
However, by the end of the week, bond yields rebounded, and mortgage rates dropped on Friday. The focus had shifted away from debt and deficits as President Trump’s tweets on tariffs against Apple and the European Union caused the stock market to decline, driving investors back to the safety of bonds. It was a whirlwind of events, but let’s delve deeper into the details.
10-year yield and mortgage rates
In my forecast for 2025, I predicted the following ranges:
- Mortgage rates: 5.75% to 7.25%
- 10-year yield: 3.80% to 4.70%
When considering mortgages and federal debt, it’s interesting to note that in the 1990s, when debt levels were lower, the 10-year yield was consistently above 5%. This contrasts with the struggle to reach that benchmark in recent years despite higher debt levels. Federal Reserve policy still plays a significant role, with the current range for the 10-year yield expected to be between 4.35% and 4.70% unless economic conditions worsen, shifting the range to 3.80% to 4.25%.
Mortgage rates increased by about 10 basis points last week, despite the Friday dip.
Mortgage spreads
Mortgage spreads have been elevated since 2022 but have improved from their peak in 2023. Despite some volatility due to tariffs, the market has stabilized. If spreads returned to their normal range, mortgage rates could be significantly lower. Historically, spreads should range between 1.60% and 1.80%.
Purchase application data
Last week, purchase application data showed a 13% year-over-year increase but a 5% weekly decrease. Positive trends have been observed in 2025, with consistent growth in year-over-year data.