Indulge me for a moment in memories of 2007. It was a time when gaucho pants were inexplicably cool, Apple was about to release a brand new iPhone and, yes, the yield on the 10-year Treasury note topped 5%. It feels like forever ago, except wait — those things are all true now, too.
Mortgage interest rates are generally benchmarked to the yield on the 10-year Treasury note, and this week that yield hit its highest level since 2007. Rising treasury yields have been pushing mortgage rates higher for a while, and now, as the 10YT has reached a nearly 20-year high, we're also seeing mortgage rates rise above 7%.
Let's break down some of the key factors contributing to higher bond yields — and higher mortgage rates. Understanding what's happening with bonds makes it clearer why rates are likely to maintain their upward momentum.
🎈Inflation
Inflation has been running hot for several years now, and the Iran war has only made it worse. In August, the Consumer Price Index rose 3.4% year over year; the Federal Reserve's target for inflation is 2%. Sidenote: The main way the Fed fights inflation is by raising the federal funds rate, which is the short-term borrowing rate the central bankers set. A rate-hiking Fed usually means higher mortgage rates, too.
But we're here to talk about bond yields, and why inflation has such a big effect on the bond market. In a nutshell, when money's worth less, bonds are worth less, too. To understand why, we need to talk about how bonds work.
Bonds are essentially tiny loans that investors give to bond issuers. (When you buy a Treasury bond, you're lending money to the U.S. government.) Over the life of the bond, the investor receives regular interest payments, and then when the bond matures, they get their initial investment back.
But bonds aren't always purchased directly or held until maturity. When investors buy bonds from each other, they're buying the bond at today's price, not its issue price.
Here's the thing. Regardless of what an investor paid for the bond, the issuer is still going to make the same interest payments. The ratio of a bond's annual interest payment to its current price is what gives us the yield. When bond prices go down, yields go up — the interest payment is being divided by a smaller number.
In an inflationary environment, demand can drop because bonds are less desirable. (If you've seen headlines referencing the bond market selloff, that's what's happening there.) Bond investors who stick it out certainly aren't going to pay face value for existing bonds, and they'll want higher yields on newly issued bonds. All told, inflation pushes up bond yields — and that dynamic's been pushing up mortgage rates, too.
Nerdy Perspective
Why are mortgage rates pegged to the 10-year Treasury when most home loans aren't 10 years?
Mortgage rates are tied to bonds because home loans get packaged into bond-like investment instruments called mortgage-backed securities. Rates are tied to the yield on 10-year bonds because, even though most home loans have 30-year terms, very few homeowners actually keep the same mortgage for 30 years — they sell or refinance long before the term is up.Mortgages (and mortgage-backed securities) come with risks that Treasuries don't have. Because of this, mortgage lenders will add a margin on top of the 10-year Treasury yield to account for that risk and cover their own expenses. So, while mortgage rates generally mirror the ups and downs of 10YT yields, the numbers themselves aren't identical.
🤖 AI and other investment opportunities
During an inflationary period, some investors are going to ditch bonds entirely for other types of investments. But lately investors are being tempted by corporate bonds — notably those offered by companies that need to raise lots of capital to fund AI development and infrastructure.
From January through July of this year, Alphabet, Amazon, Meta and Oracle issued approximately $132 billion worth of bonds, according to global investment group Vanguard. For comparison, in all of 2024, big tech issued roughly $20 billion in bonds. The rise of AI has driven the stock market to new heights this year, but it's also been a major force in the bond market.
This has pushed up Treasury yields for two related reasons. One is simple supply and demand. The other is what all this investment in AI could mean. If AI lives up to its promises of increased productivity, that growth could drive inflation. Strong inflation could force the Federal Reserve to keep the funds rate high. And we just went over what inflation does to bonds.
🏛️ Government debt anxiety
I mentioned above that when you buy a bond, you're buying a little piece of U.S. government debt. And there's a lot of debt to go around — over $40 trillion, as of August.
Historically, Treasury bonds have been one of the safest investments one could make. You're lending money to the U.S. government, and the U.S. government is about as trustworthy a borrower as you could ever hope to find.
Lately, though, the U.S. has been looking a little less scrupulous. The national debt keeps rising and the government keeps spending. Tax increases or spending cuts, both of which could at least try to make a dent in the U.S.'s massive debt, don't appear to be on the table.
Investors aren't thinking the U.S. is about to default, but America's not being super responsible with its cash, either. So the same way that a mortgage lender's going to offer a higher interest rate to a borrower with shaky finances, investors buying Treasuries are going to demand higher yields to account for that increased risk.
Additionally, more debt means the U.S. issues more Treasuries, so we're right back into basic supply and demand again.
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🤓 Kate on Rates: September 24, 2026
Will rates drop?
There's more going on with the bond market than what I've just described, but the key takeaway is that we are likely in a higher for longer rate environment. It would take a significant shift to alter the trajectories of inflation, AI growth or the national debt.
Additionally, the Federal Reserve has signaled that at least one additional rate hike is likely before year's end. Fighting inflation is the main purpose of raising the funds rate, so in the long term the Fed's actions could ease bond yields and mortgage rates. In the short term, however, mortgage lenders tend to price in the Fed's expected decisions ahead of time — so if a hike starts to look more likely at the October or December meetings (or both), that could put additional upward pressure on mortgage rates.
If you're a homeowner who was hoping to refinance, you may be in for a long wait. At today's rates, extremely few homeowners would be able to see savings with a rate-and-term refinance.
If you're considering buying, budget for what you can afford at today's rates. Yes, it would be great if rates dropped and you could refinance in the near future, but no one can guarantee where mortgage rates are going next. Pushing your budget to the limit thinking you won't have to put up with it for long could easily backfire. In other words, when it comes to mortgage rates, you can hope for the best, but don't attempt to plan for the best.
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