10-year yield and mortgage rates
In my 2025 forecast, I anticipated the following ranges:
Mortgage rates between 5.75% and 7.25%
The 10-year yield fluctuating between 3.80% and 4.70%
For most of the year, the 10-year yield and 30-year mortgage rates have acted perfectly normally, with job growth slowing down. The 10-year yield peaked around 4.79% and mortgage rates have ranged between 6.13% and 7.25%. As the year has progressed, the 10-year yield has trended down toward 4% and has adequately accounted for the softening of the labor data.
Last week, the 10-year yield experienced a relatively calm week considering the fireworks of Fed week. It began at around 4.07% but then dropped to around 4%. This surprised me, especially after the stronger-than-expected retail sales report last Tuesday. Following the Fed’s press statement and Jerome Powell’s comments, the bond yield rose and ended the week at 4.13%. While this change wasn’t dramatic, the real activity took place in the mortgage spreads.
Mortgage spreads
This year has seen favorable pricing primarily due to improvements in mortgage spreads compared to the levels of 2023 and 2024. As long as there are no significant market disruptions and the Federal Reserve continues to cut rates toward neutral, I expect this trend to continue.
For my 2025 forecast, I expected a 0.27% to 0.41% improvement in mortgage spreads, based on an average of 2.54% for 2024. With the current level at 2.19%, we have already reached the target level for 2025. This week, there was significant volatility in the spreads that isn’t fully captured in this weekly chart. To simplify, the spreads improved considerably before the Federal Reserve meeting but then lost that extra favorable pricing. Overall, mortgage pricing was quite volatile this week, although things settled down on Friday.
If the spreads today were as bad as they were at the peak of 2023, mortgage rates would currently be 0.91 percentage points higher. Conversely, if the spreads returned to their normal range, mortgage rates would be 0.39% to 0.59% lower than today’s level. Historically, mortgage spreads have ranged between 1.60% and 1.80%.
The best levels of normal spreads would mean mortgage rates at 5.76% % to 5.96% today.
Mortgage rates for the rest of the year
There has been a lot of positive news regarding lower mortgage rates, which has now been factored into the market. This trend has allowed many American homeowners to lock in these favorable rates, as seen on our Mortgage Rates Center which tracks locked rates according to the Polly pricing engine. American households are increasingly securing lower rates, which is a positive development.
Looking ahead, I believe it will be challenging for mortgage rates to drop further unless we see weaker economic data, a more dovish stance from the Federal Reserve or improvements in mortgage spreads that could reduce rates by 0.39% to 0.59% toward the recent historical range. In this article, also published today, I highlight how mortgage rates falling below 6.64% have positively impacted some housing data when examined closely.
To accurately forecast the lowest point for mortgage rates, we will need to consider the three factors mentioned above. If economic and labor data improve, we may have more potential for rates to rise rather than fall.
