The Lombard Review
Markets & Finance

The Fed cut rates. Why are mortgage rates rising?

Term premium reprices post-easing

The north face of the Eccles Building, Washington
The north face of the Eccles Building, WashingtonPhoto: AgnosticPreachersKid / Wikimedia Commons, CC BY-SA 3.0
1 min read Data: 10Y ~4.0% from 3.62%

In one of the most counterintuitive market moves of recent years, the Federal Reserve’s jumbo 50-basis-point interest rate cut was immediately followed by a sharp surge in long-term borrowing costs. The benchmark ten-year Treasury yield climbed from 3.62 per cent to over 4.0 per cent, driving thirty-year fixed mortgage rates back toward seven per cent.

Aerial view of a new housing development
Aerial view of a new housing developmentPhoto: Charles O'Rear / Wikimedia Commons, Public domain

The Term Premium Revolt

Homebuyers and equity investors expecting immediate financing relief were left bewildered. The explanation lies in term structure dynamics: by cutting rates into economic resilience, the Fed ignited inflation expectations and fueled the 'higher nominal growth' thesis. Long-term bondholders demanded higher yields to compensate for prospective inflation and relentless federal debt supply. Monetary easing at the front end steepened the curve.

A supermarket aisle in Vermont
A supermarket aisle in VermontPhoto: Tessa Bury / Wikimedia Commons, CC BY 4.0

The post-cut surge in mortgage rates was a painful lesson in bond market mechanics: central banks can dictate overnight rates, but the market sets long-term borrowing costs.