Treasury yields climbed overnight, potentially pushing mortgage rates even closer to 7%
Ten-year Treasury yields have soared to their highest level since 2007 and expectations of a Federal Reserve interest rate hike are surging, potentially putting further upward pressure on US mortgage rates.
A selloff in US government debt gathered pace on Monday, pushing the 10-year yield – which strongly influences 30-year fixed-rate mortgage rates – higher, although it ticked down slightly on Tuesday morning.
That climb signaled further bond market concern about the US economy amid geopolitical tensions, rising oil prices, and a ballooning national debt. It also marks bad news for mortgage market watchers hoping for a dip in rates, which have continued rising in recent weeks.
Last week, the average 30-year fixed-rate mortgage increased to 6.76%, according to Freddie Mac, up from 6.71% the week before. Fifteen-year mortgage rates also jumped, rising to 6.09% from 6.04% seven days prior.
The Fed is scheduled to deliver its next rate decision tomorrow afternoon, with financial markets increasingly pricing in the possibility of a hike.
The CME’s FedWatch tool, a gauge of traders’ expectations for the central bank’s upcoming announcements, showed a 92.5% chance of a rate increase tomorrow, reflecting what traders see as growing unease by Fed decisionmakers about the inflation outlook amid the continuing Iran war.
The consumer price index (CPI) rose by 0.4% month over month in August, the Bureau of Labor Statistics (BLS) revealed last week, a result that experts said opened the door for a rate increase by the central bank.
First American senior economist Sam Williamson said that hotter-than-expected reading “puts another thumb on the scale” toward a rate hike by the Fed. “With the labor market still on solid footing, policymakers have room to lean harder against inflation,” he said.
“That would likely keep borrowing costs elevated in the near term as markets price in a higher path for interest rates.”
7% mortgage rates becoming a real possibility
A continued increase in the 10-year Treasury yield could nudge mortgage rates back to 7%, a level viewed by many mortgage professionals as an important symbolic deterrent for potential homebuyers.
“Over the course of the past year, people have grown used to 6.25%, 6.5%, occasionally flirting with 6.75%,” Mark Siwiec, a real estate professional based in Rochester, told Mortgage Professional America. “Most people started to become very comfortable with 6.5%.
“Now, as it’s pushing 6.8% or perhaps 7%, that is a barrier. And we’ve seen buyers step aside. We’ve seen buyers who are now on the sidelines waiting for greater geopolitical stability, greater economic stability, or waiting for the Strait of Hormuz to open – waiting for the war with Iran to come to an end.”
The rate volatility appears to be weighing on the overall national housing market, with existing home sales slumping last month to their slowest pace for over a year.
Sales of previously owned homes were down 2% month over month in August, the National Association of Realtors (NAR) said, slipping by 1.2% compared with the same month in 2025.
Huge stakes for Fed as next decision nears
With a Fed rate hike suddenly looming, tomorrow’s decision could put chair Kevin Warsh on a collision course with President Trump, who last weekend repeated his frequent claim that the US should have the world’s lowest interest rates.
In early September, Trump threatened to cut off trade with countries with which the US had a trading deficit if the central bank didn’t bring rates lower.
But financial markets see little chance of the Fed slashing interest rates anytime soon, with oil prices showing no sign of a big imminent drop while the US-Iran war continues.
The Fed funds rate currently sits at a range of 3.5% to 3.75% – but FedWatch suggests traders see a 43% chance of that rate hitting 4.0% to 4.25% on October 28, indicating a rising possibility of successive 25-basis-point hikes in the Fed’s next two decisions.
Stay tuned tomorrow for all our coverage of the Federal Reserve’s much-anticipated decision – and make sure to subscribe to receive all the biggest mortgage news of the day here.
