The Trump Administration’s trade war continues to roil both the financial markets and key economic indicators, such as consumer sentiment. The anxiety around the market has even spread to the US Treasury market, where the damage could cause borrowing costs for households to rise, especially for home mortgages.
A bond is essentially a loan, either issued by a government or a company. In return for the loaned money, the issuer promises to make regular interest payments, called yields. Treasury yields specifically refer to interest rates paid on US government bonds.
Recent market concerns about potential fiscal policies from the Trump Administration have triggered significant selling of US government bonds. When investors sell their bonds, their trading values fall below their face values and yields to rise, resulting in a greater risk in holding these previously safe investments.
This market reaction has caused Treasury yields to spike dramatically, particularly the 10-year Treasury note. While the market in question is mainly a playground for the wealthy, the downstream effects touch all aspects of the economy relevant to Main Street. For example, the 10-year Treasury notes serve as a reference point for many long-term interest rates for home mortgages, which, unlike for higher income individuals, regular people must take out to buy property.
The historical correlation between Treasury yields and mortgage rates means homebuyers now face significantly higher borrowing costs. This direct relationship between government bond market activity and the cost of buying a home demonstrates how macroeconomic factors and policy decisions can impact everyday Americans.
The statistical correlation between the 10-year Treasury yield and the 30-year fixed mortgage rate is .944. Statistically, this is almost as close to a perfect correlation as it gets, indicating that when Treasury yields rise, mortgage rates closely follow. After establishing the correlation between Treasury yields and mortgage rates, the next step is to detail what influences changes in the former Treasury yields.
On April 9th of this year, the 10-year Treasury yield jumped over 50 basis points (one basis point equals .01%) to an intraday high of 4.5%. The immediate culprit of this spike was investor concerns over Trump’s “Liberation Day” tariffs placed on almost 60 countries. Investors saw the tariffs as being inflationary and slowing long-term growth, which caused yields to rise steadily earlier in the week. It’s not clear which market participants responded in this way on April 9th, with accusations being levied at everyone from Wall Street hedge funds to the Bank of Japan (Japan’s equivalent to our Federal Reserve).
Only with the release of detailed data from financial regulators will the participants of the bond market “rebellion’’ of April 9th potentially be revealed. However, the underlying cause – the inflationary Trump tariffs – is what is relevant for this particular discussion.
Government actions have consequences. In this case, global investors retaliated by selling off US Treasury bonds. Given the role those bonds play in the US mortgage market, American homeowners became collateral damage. It has become well established that government actions, like massive tariffs, can influence Treasury yields, which, in turn, can affect mortgage rates.
This means that public policy can unexpectedly increase barriers to homeownership by raising the cost of taking out a mortgage loan. Statistical modelling can be used to better understand how mortgage rates could potentially respond to a change in Treasury yields.
Using a simple regression model to understand the relationship between Treasury yields and mortgage rates, Figure 1 indicates that a 1 percentage point increase in yields is associated with a 1.03 percentage point increase in the mortgage rate. This means that there is nearly a 1:1 relationship between the two rates.
Using recent Home Mortgage Disclosure Act loan data, we can determine how the total cost of a mortgage loan changes when the interest rate rises. In 2024, the average home purchase loan amount was $388,716, with an average annual percentage yield (APY) of 6.66%. This means the total cost of a 30-year fixed mortgage is $899,278. A 1% increase in the APY would increase the total cost of a mortgage by $94,564, or 10.5%. This is consistent when broken down by racial groups, with the total costs increasing between 10.5% and 10.6% across the board.
If the Trump Administration’s actions continue to drive up Treasury yields, prospective homebuyers will face higher monthly payments and reduced wealth building ability over time. Continued increases in the costs of homebuying will exacerbate wealth inequalities, especially in cities like New York City, making a home something you inherit rather than purchase through a mortgage loan. Despite the president’s frequent claims to be focused on lowering the cost of living, things like trade wars are making homeownership more expensive for all Americans.
Joseph Dean is the Jr. Racial Economic Research Specialist with NCRC’s Research team.
Photo credit: Connor Gan via Unsplash.
