Yield Curves & Mortgage Rates

AKA why "The FED dropped rates but mortgage rates didn't move"

Working in finance, I get this question from people a lot “The FED dropped rates, but mortgage rates didn’t change?”. Or sometimes it is in the form of “Do you think I should wait to buy a home till mortgage rates come back down now that the FED is dropping rates?”.

Even amongst co-workers in a financial institution, people will ask in meetings if our yield on new money investments is going to go down because of FED rate cuts - despite buying almost exclusively 10+ year-to-maturity products due to long-dated liabilities.

And at some level, it isn’t an absurd ask. The thinking is:

• The FED lowers rates

• The curve goes down

• Yields across all financial products follow

But it shows a fundamental lack of knowledge on the yield curve.

And I get it - even going through school with a financial math focus, and taking classes on investing, the mechanics of the yield curve seemed vague. It wasn’t till doing a few years in bond investing and being around decades of experienced traders that it made sense.

So a normal guy off the street who only here blurbs and the lowest IQ takes (talking heads on the business news channels) is really behind the 8-ball.

This post will cover the foundational stuff about the full curve, the FED’s impact, and how it impacts you. You won’t ever wonder why ‘The FED cut rates, but mortgage rates increased” again.