Skip to content 
In the final quarter of 2024, the Federal Reserve cut the federal funds rate twice, stirring excitement among potential homebuyers who anticipated a drop in 30-year mortgage rates. However, mortgage rates did not follow suit, leaving many puzzled. This outcome, while counterintuitive, aligns with how fixed mortgage rates are influenced by broader market dynamics.
The Fed Funds Rate vs. Treasury Notes: A Better Predictor
A common misconception is that the federal funds rate is the best indicator of mortgage rate trends. However, the data shows a different reality.
As seen in the chart above, the 10-year Treasury note (yellow line) continued its upward trend even after the Fed’s rate cut in September. Similarly, the average 30-year fixed mortgage rate (orange line) remained elevated. After the Fed’s November rate cut, mortgage rates stabilized, mirroring the leveling off of the 10-year Treasury note.
This relationship underscores that the 10-year Treasury note is a far better predictor of fixed mortgage rates than the Fed funds rate. The connection between the two exists because both are long-term financial instruments influenced by economic factors like inflation, job growth, and investor sentiment.
When economic growth appears strong, investors demand higher yields on 10-year Treasury notes, viewing alternative investments such as public equities or private equity as less risky. Conversely, during economic uncertainty, investors flock to 10-year Treasuries as a safe haven. Mortgage-backed securities, which underpin home loans, compete directly with 10-year Treasuries for investor capital, creating a close correlation between the two.
The Economic Outlook and Implications for Mortgage Rates
At the end of 2024, economic indicators remained mixed, though there were signs of strength heading into the new year. This optimism has led some to speculate that the Federal Reserve might pause further rate cuts. Additionally, some analysts believe that the anticipated rate cuts for 2025 may not materialize. In November, the Federal Open Market Committee (FOMC) signaled that future rate adjustments would likely occur gradually.
Takeaway for Homebuyers and Real Estate Investors
For those planning to buy a home or invest in real estate, it’s important to set realistic expectations. Significant changes in mortgage rates are unlikely in the near term unless there is a substantial shift in economic conditions. Understanding the relationship between Treasury yields and mortgage rates can provide clearer insights into market trends.
