What Helps to Move Interest Rates

Mortgages in the United States don’t move in lockstep with the 30-year Treasury bond. But the same factors influence both, and right now the 30-year T-Bond is at a 19-year high yield. Investors demand more compensation for long-term risk. What should LOs know about investor mindsets?

Beyond rate expectations, which can move rates, a second force is pushing longer-term yields higher: term premiums, or extra yield investors require in order to hold a long-term bond rather than roll over short-term instruments. It compensates for the uncertainty inherent to locking up capital for a longer term (e.g., inflation, fiscal policy, economic growth, etc.) and whether the bond will be worth anything close to face value if sold before maturity.

Between 2010 and 2022, the average term premium was near zero and even went negative during three periods in that timeframe, suppressed by central bank asset purchases, low economic growth projections, and a below target inflation environment. That era is over. According to the St. Louis Fed, the 10-year term premium reached its highest level since 2011 at the start of 2025, surpassing 0.8 percent and averaging .55 percent since then but has now moved higher. The elevated term premium has been driven by hotter-than-expected inflation prints, stronger economic growth expectations, and increased debt supply. 

Fiscal dominance and massive government borrowing are now a permanent fixture of the market landscape, requiring higher yields to attract buyers for the ever-increasing supply of Treasury debt.” Goldman Sachs echoed this view, with its chief economist noting that the U.S. deficit ratio ‘would need to be several percentage points lower than it is now in order to stabilize the increase in debt-to-GDP.’ This has pushed real yields higher and kept Treasuries cheaper than they’ve been in a decade.

But loan officers should know that inflation, growth, and deficits are partly to blame. Treasury yields, as well as MBS prices, also embed the market’s collective view on three structural forces: inflation, economic growth, and the U.S. government’s borrowing needs.

On inflation, despite the Fed’s progress since the 2022-2023 peak, core PCE remains well above the 2 percent target, and recent data have raised questions about whether further declines in inflation will be as quick and smooth as hoped. To preserve future purchasing power, investors who expect inflation to run at 2.5-3 percent over the next decade will demand at least that much in yield from a 10Y bond, keeping rates elevated regardless of what the Fed does overnight.

On economics, Charles Schwab’s 2026 fixed-income outlook noted that large and rising fiscal deficits (and the increasing Treasury issuance required to fund them) mean investors must be enticed into buying the long end of the market, putting upward pressure on yields. The Council on Foreign Relations also flagged that tariff-related uncertainty has added another layer of complexity, with the 10Y yield rising by 34bp in just seven days following the Liberation Day tariff announcements as the market recalibrated.

Stronger-than-expected economic activity compounds the macro-economic picture: controlling a robust or “hot” economy suggests the Fed may not need to cut rates and could even be forced to raise them to keep inflation in check, reinforcing the “higher for longer” dynamic at the long end. This week’s Fed meeting, and the vague, non-committal speech given by Fed Chair Warsh, didn’t help rates.

One final factor that is easy to overlook: the Treasury market is global, and the U.S. doesn’t set its own long rates in isolation. Foreign central banks, sovereign wealth funds, insurance companies, and global asset managers are among the largest buyers of U.S. Treasuries. The treasury market, including the 10-year, is essentially a global instrument subject to diverse investor demand far beyond any central bank’s control. If overall demand falls, rates rise regardless of what the Federal Open Market Committee does to the Fed Funds rate.

On that note, the Council on Foreign Relations highlighted that one of the longer-term risks to Treasury markets is “questionable foreign demand,” particularly if geopolitical tensions or trade policy changes alter the calculus for foreign holders of U.S. debt. Currency hedging costs also matter. When it becomes expensive for a Japanese or European investor to hedge their dollar exposure, U.S. Treasuries look less attractive, and yields must rise to compensate. When global investors are in risk-off mode and seeking safety, they often sell other investments and buy treasuries, that increased demand pushes yields lower. When they’re rotating out of treasuries and into equities or other assets (or when geopolitical friction lowers their appetite for U.S. debt), they sell, or buy fewer, treasuries and yields rise.

LOs may find it tough to explain to borrowers that the bond market is doing exactly what it’s designed to do: look past the present and price in the future. What will the economy do? Will investors want to buy U.S. securities given the budget deficit?

Here are five key takeaways worth keeping in mind for your next client conversation about rates. First, the Fed controls one rate, the market controls the rest: The overnight rate anchors the short end of the curve, while the 10Y reflects what the market thinks the Fed, inflation, and the economy will look like over the next decade. These are two very different conversations.

Fewer future cuts or raises mean higher or lower long-term yields today: Long-term yields don’t just reflect cuts or increases already made, but also what the market believes the Fed will do over a decade, and revised expectations have kept the long end elevated even as the short end falls.

The term premium has returned: Investors are demanding extra compensation to lock up money for 10 years given uncertainty around inflation, deficits, and long-term policy, a dynamic that pushes the 10-year higher independent of Fed action.

Inflation, growth, and deficits are structural anchors. Long term yields, like the 5-year and 10-year, which are what MBS track, can be thought of as a simultaneous vote on long-run inflation expectations, economic growth projections, and confidence (or lack thereof) in U.S. fiscal policy, all three of which are giving investors reason to demand higher yields.

Global investors move U.S. rates, too. Shifts in foreign demand, risk appetite, and hedging costs move U.S. long-term rates regardless of what the Fed does, another reason long-term yields on the 5- and 10-year treasuries don’t simply follow moves in domestic monetary policy.

Clients who understand why long-term rates behave the way they do are better equipped to make smarter financing decisions. And the AE or originator who can explain it clearly, succinctly, without jargon, and without alarm will earn a level of trust that goes well beyond the transaction at hand.