LIVE MARKETS-Mortgage rate relief hinges on Treasury yield curve

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MORTGAGE RATE RELIEF HINGES ON TREASURY YIELD CURVE

Hopes for lower mortgage rates will depend on whether long-term Treasury yields decline, as the yield curve remains the key determinant of borrowing costs in the U.S. housing market even as the Federal Reserve cuts interest rates, said Morgan Stanley.

Despite a cumulative 125 basis points of Fed rate cuts since September 2024, benchmark mortgage rates have risen by approximately 25 to 30 basis points during the same period, Morgan Stanley analyst Vishwanath Tirupattur said in a report.

That is because the rates are closely tied to the longer end of the yield curve, which has shown relative stickiness, keeping borrowing costs elevated.

“While a steeper curve can benefit mortgage lending and future housing supply, higher long-end yields are keeping mortgage borrowing costs aloft and posing a significant headwind for affordability,” Morgan Stanley said.

“Here, a flatter curve driven by lower long-end yields would offer more meaningful relief to prospective home buyers. However, our base case maintains a steepening bias, suggesting that the affordability challenge in housing may persist for some time.”

Lower front-end Treasury yields, particularly the 2-year yield, have declined by approximately 60 basis points this year, outpacing drops in 10-year and 30-year yields, which fell by about 40 and 5 basis points, respectively.

“The bottom line: while the timing and magnitude of the Federal Reserve’s rate cuts clearly matter to markets, the evolution of the yield curve’s shape may be more consequential,” Morgan Stanley said.

(Karen Brettell)

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