Treasury Bonds Relation to Mortgage Rates

Treasury Bonds

There are many different names when it comes to treasury bonds. They can also be referred to as long bonds or as T-Bonds. But whichever name used, the specifics of the bond is still the same. They are firstly known to have the longest maturity date. This is either from ten years or to thirty years. For bonds with the maturity of thirty years, there are coupon payments every six months.

For bonds with a ten year maturity the yield on them was used as a proxy for long term interest rates. This is due to the market being highly liquid and because bonds with ten year maturity became more popular than bonds with thirty year maturity. Thus in 2001, the US government stopped issuing bonds with thirty year maturity.

However, they started to issue them again in 2006. This was mostly due to the need to diversify their liabilities. As well as that, since the yield curve had become flatter, it meant that the opportunity costs when it comes to selling longer-term bonds had also dropped.

Mortgage Rates

Mortgage rates are interest rates on the home loan. There are two options when it comes to the interest rate. Firstly, it can be fixed at a certain pre-determined interest rate for the life of the loan. Or it can vary throughout the life of the loan. It will change at certain pre-determined periods throughout the life of the loan. The changes in the mortgage rate can either go higher or lower then what it already was. As well as that, it should be known that the payment of the interest rate is done throughout the life of the loan.

Treasury Bonds and Mortgage Rates

It may not be known but treasury bonds effect mortgage rates. Typically, mortgage rates are set by the yields on ten year and thirty year securities. However, for loans with shorter terms, they are set to shorter-term securities. Fifteen year mortgage rates are set to the yield of ten year securities.

The same way, thirty year mortgage rates are set to the yield of thirty year securities. Thus, when yields on these ten year and thirty year securities drop so does the mortgage rates on the fifteen and thirty year mortgage rates. And when the yields rise on these securities so does the mortgage rates. There have been cases however, where they had no effect on each other, but in most cases they do.

In the end, lower yields on securities mean lower mortgage rates. This in turn allows prospective home-owners to purchase larger homes and renters looking to buy a house, to afford one. When this happens, it stimulates the real-estate market which in turn helps the economy. As well as being able to afford a larger house, it allows prospective home-owners to be able to afford a second mortgage due to the lower mortgage rates.

This also helps the economy in the long run. The following article has explained what treasury bonds and what mortgage rates are. As well as that, the relationship between them. The ways in which they effect the economy has also been discussed.

http://en.wikipedia.org/wiki/Treasury_bills#Treasury_bill
http://mortgage-x.com/general/treasury.asp
http://wiki.answers.com http://www.mortgagenewsdaily.com/wiki/Rates_and_Bonds.asp
http://en.wikipedia.org/wiki/Mortgage_loan