You’re Not Gonna Like What Happens to Mortgage Rates

0:00The Treasury Secretary of the United States, Scott Bessett, looked at the bond market this week and said, and I am quoting here, I am the house now. You can bet against me if you want. Well, the bond market took that bet and the bond market won. Within hours, the 10-year treasury yield blew out to a new high. The next day, the average 30-year mortgage rate hit 7.07%, the highest it's been since May of 2025. And here's why this matters more than any Fed meeting you're going to watch this year. Washington is now actively, publicly, trying to push long-term interest rates down. And it isn't working, which tells you something really important about what's actually driving our mortgage rates right now.

0:51So today on On the Market, we're breaking down the bond market. What's happened to yields over the last few weeks? Why it's happening? What the Treasury Department is doing about it? how markets responded, and the part that actually you care about, what all this means for mortgage rates and for your deals. And I'll also give you my honest mortgage rate forecast. And a little spoiler alert, I feel pretty good about this forecast, but you're probably not going to like it. But these are things that you need to hear to prepare for what's coming next. This is On The Market. Let's get to it.

1:30Hey, everyone. Welcome to On the Market. I'm Dave Meyer, Chief Investment Officer at Bigger Podcast. And I have been waiting, not happily, but I have been waiting to make this episode for a couple of years now. Because if you listen to the show for any length of time, you've heard me say some version of the same thing over and over again. The Fed doesn't set your mortgage rates, the bond market does. And the bond market has been acting in a way that I've been saying for a couple of years was probably going to happen. And they're acting in a way that makes it really hard for any Fed chair or, as we're seeing, any Treasury secretary to fix.

2:08And I've been calling the risk of persistently high rates out for a long time. I've been trying to say on the show every year we make predictions. Every time I post something on social media, I'd say rates aren't going down. I have so many people telling me that I'm being a downer or that I'm wrong. But some of the things that I've been predicting were going to happen are starting to happen. I think we're starting to get there. And I am not trying to do a victory lap here. I'm not excited about what's going on here. I'm not trying to fear monger. I'm not saying there's a crash, but something real is happening in the bond market.

2:45It has been building for years. And I feel like just in the last couple of weeks, maybe in the last month or so, it is starting to finally show up in mortgage rates. It's starting to get attention in the investor world. And I do think it is going to have a real direct, probably long-term impact on the housing market. So first up, let's just talk about what actually happened. The big picture headline is that the 10-year treasury yield, which again, this is the thing that is most closely correlated to mortgage rates. When the treasury yield goes up on the 10-year, mortgage rates go up. When it goes down, mortgage rates go down.

3:26That's not always true throughout history, but over the last several decades, they have really worked in lockstep. And the 10-year treasury has gone up a lot. It's now nearing 5%, where it has not been for quite a while. About a year ago, it was up about 4.3%. And so it's not like some crazy thing, but the fact that it is moving up and moving up so quickly is what's concerning me. And I think what's concerning investors, not just real estate investors, stock investors, gold investors, this is something that impacts everyone. I've made this joke a lot on this show, but it is true. I think bonds rule the world.

4:03Like what happens with the bond market cascades through every other type of investment. I'm not going to spend a lot of time on that today, but just think of it this way. Bonds are what are known as, quote unquote, risk free assets. They're not risk free. That is not true. But investors see it that way. They are the lowest risk investment out there other than putting your money in a savings account, right? That's FDIC insured. But because they are the lowest risk out there, when bond yields go up and you get a better rate, you get a better interest rate, a better return on bonds, then all of a sudden riskier assets look less attractive.

4:41If you can earn 5 % lending the U.S. government money for 10 years, maybe you don't invest in gold or maybe you don't invest in the stock market because you can get a decent return on low risk. And so the fact that yields are climbing is going to ripple throughout the entire economy, real estate included. Now, I want to mention that this is not just happening with 10 years. It's also happening with the 30 year treasury. It's now at 5.34%. And this is the highest it has been in nearly 20 years. This is the part I think that really matters for real estate investors, because when you look at bond yields and the yield curve, right, this is complicated.

5:22I'm not going to get super into it, but bonds come in all lengths, right? There are short-term bonds and there are long-term bonds. And where we're seeing yields go up are in long-term bonds, 10-year treasuries and 30-year treasuries, right? And this matters for real estate investors because we borrow at the long end. We borrow for long periods of time with 30-year fixed rate mortgages, right? Or even relatively long, even if you're getting an arm or something for seven, 10 years, that's a relatively long loan, right? And so seeing the yields go up on those bonds are going to push up mortgage rates and it's going to push up commercial lending rates too.

5:59So this really does matter for real estate investors. And the fact that where we're seeing yields go up is for long dated bonds, not the shorter term ones, tells you this is an important signal. It tells you that the market, what they're worried about, why this is happening is something long term. They're worried about long term performance. And I'll get to what I mean by that. But they're worried about something structural in the global economy that's going to impact returns. Right. It's not something that's cyclical. They're not worried about something that's going to happen in one year or two years.

6:34If they were worried about that, we would see yields on short-term bonds go up, but they're going up on long-term bonds. And I know this is kind of complicated, but here's what you need to know. Yields are going up for long-dated bonds. That's going to push up borrowing costs for investors. Now you know that, we need to talk about why this is happening. This is the question, right? And the answer is clearly not the Fed, because the Fed has sort of been sitting still. By the time this episode comes out, it's coming out the day after the Fed meeting. I am willing to bet I'm going to record this and put it out to the public and say that the Fed raised rates yesterday.

7:11But all this stuff happened before raising rates. So it's not the Fed. And I actually think there's a bunch of different factors that are influencing them. Let's go through them, because I think this is really what's going to tell us what happens with mortgage rates in the next three months, six months, six years, right? Number one, fiscal anxiety. This is one I have been sort of hammering on for years and calling out as a risk to the entire economy for years. And what I mean by that is that investors are starting to worry about the massive amount of public debt that we have here in the United States.

7:49Our total public debt just crossed$40 trillion, right? That is huge. And it is going up fast. Less than a year ago, we were at$38 trillion. We are getting a trillion dollars in new debt every five months. This is not normal. This is not good. I know people have different opinions about debt, but no one can convince me that right now with the economy that we're in, that a trillion dollars in debt every five months is a good thing. Interest on that debt is now one of the three biggest line items in the entire budget. And there's no end in sight. We have not had a balanced budget in the United States for 25, more than 25 years.

8:33This is a problem that spans administrations, political parties. It has just been going on and on and on. And frankly, it's gotten a lot worse over the last couple of years. And I've been worried about this. And clearly, bond investors, bonds rule the world, they are starting to get worried about it as well. Because what do bond investors care about? They care about inflation. Think about it. Bond investors are extremely sensitive to inflation. Because if you're going to lend the US government money for 10 years or for 30 years, the big risk to you is not that the government is going to pay you back.

9:15There is almost no risk that the government's not going to pay you back. The risk is that to pay you back, the U.S. government is going to start printing money and devalue the debt. And so if you're worried that the inflation rate over the next 10 or 30 years is going to be 4%, you sure as heck don't want to earn a 4 % yield on your bond because then you're basically making no money. In quote unquote real terms, inflation adjusted returns, if inflation is 4 % and your yield is 4%, you're breaking even. That's it. And so when investors are worried about inflation, they demand higher rates from the government, right?

9:57So this is one of the main reasons we are seeing yields go up. The second thing about this increasing debt is just supply and demand, right? Because the more we need to borrow means there is more supply of bonds, right? You can't just go out and magically create bonds and have people buy them. There's actually people who have to go and buy these bonds. And the more supply out there means there might not be as many people who want to lend the U.S. government money at these rates. And so in order to entice people to buy and create the demand for all this new supply, they need to increase their yield, right?

10:44So those are two different reasons our national debt is creating higher yields. Now, on top of that, a third thing is AI. AI is creating a massive amount of supply for debt. these companies that are scaling and spending hundreds of billions of dollars a year on infrastructure build-out and data centers, they need debt. And so they're issuing bonds. They're getting debt from the private market. And so now the U.S. government has to compete with OpenAI and Anthropic, who are offering higher yields than the U.S. government. And surely those AI build-out bonds are riskier, but it's more competition.

11:26All of this is to say, The debt market has a lot of supply and investors are clearly worried about the amount of debt out there. That is, I think, one of the major reasons why we're seeing yields go up. And remember that because in a couple of minutes, we're going to talk about what happens from here. But I'll just fast forward a little bit. We're going to talk about are things getting better? You think the deficit's getting better anytime soon? I don't. You know, 25 years since we've had a balanced budget. That wouldn't even reduce our debt. We would need a surplus to reduce the deficit. But I mean, it would be a step in the right direction.

11:59So that's the first thing. The second thing is short-term inflation, right? That is also bad, right? Like the war in Iran has created an energy shock and inflation has remained sticky. You know, inflation was going down until the war in Iran, and then it started going up. We're now seeing oil back up near$100 a barrel because there is no end in sight to the war, right? No one's even talking about a peace deal anymore, right? It's just going on in the background silently while oil is going up, fertilizer prices are going up, food costs are going up. And so inflation has remained sticky. We just got a print the other day and inflation's at 3.4%, well above the target of the Fed, which is 2%.

12:42We also had a hot producer price index, which is a different measure of inflation, but that came out that was hot as well. And so, again, bond investors worried about inflation. That's another reason yields go up. The third reason, and there are other reasons, but the third reason and last one I'm going to talk about here today is what has to do with the Fed. And it's not actually, you know, what they do this month or next, but we have a new Fed chair, Kevin Warsh, and people just don't know what he's going to do. A lot of people are fearful that because Trump has repeatedly said he wants lower interest rates that Warsh is going to lower interest rates even in the face of inflation.

13:22And he hasn't said that he's not. And so until we get a sense of what the Fed is going to do, I think bond investors are going to be very cautious. Now, as I said, I'm recording this a few days before the Fed meeting. I think they're going to raise rates because they have to address this. They have to address what is going on in the bond market. Otherwise, we're going to see bond yields go up and that can be very damaging to the economy. But I do think that's playing in here. Like, I think the bond market is trying to send a signal to Kevin Warsh, you better raise rates. Not because that's good for the country short term, but because if he doesn't and if he and the rest of the FOMC vote on interest rates, if they collectively say, hey, we're going to keep rates low, we're even maybe going to lower even in the face of all the fears that the bond market has, not good.

14:14That's why I think the Fed doesn't really have an option anymore. They have to raise rates to send a signal back to the bond market that they are taking inflation seriously and they are not going to let it run wild. Now, it's not totally up to the Fed, right? All the spending and debt that comes down to the president and Congress. Congress has power over the purse, not the Fed, right? But the Fed showing that they're going to do what they can on the monetary side could help. That could help send the right signal to the bond market. OK, so now we've talked about what has happened. Yields are going up.

14:48We've talked about three of the main reasons why it's happening. Let's turn our attention to what happened with the Treasury last week and Washington, the Trump administration's intervention, because this really matters. We do have to take a quick break, though. We'll be right back. Quick word about a new pro perk you'll want to know about. AVEN, if you're a homeowner, there's a good chance you're sitting on equity that you're not using. The problem is tapping into that usually means a cash out refi, a traditional second mortgage, or weeks of paperwork just to get approved. AVEN built something different.

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18:08Welcome back to On the Market. I'm Dave Meyer. Today on On the Market, we're talking about a crazy week, crazy month that we've been having in the bond market. We've talked so far about what has happened, why the bond market is going up. Now let's turn our attention to what actually happened, because this is a pretty crazy thing, in my opinion. And I don't think it's getting nearly enough attention in the media or in the real estate world in particularly. But back on August 19th, one day after the 30-year yield hit that 19-year high, the Treasury Department announced it would double the size of its bond buyback operations for long-dated Treasuries.

18:47A buyback is the government buying back its own outstanding bonds in the open market. Fewer long outstanding bonds, in theory, this is the theory, means less supply pressure, right? There's less bonds out there. And so maybe demand and supply will become in equilibrium. But what they're doing here is just a little bit of financial engineering here, right? Because what money is the treasury going out and buying those long dated bonds with? They're just buying them with new debt. They're issuing short-term debt, short-term treasury bills to go out. They're borrowing money to go out and buy back their own money that they borrow, right?

19:30It's just kind of confounding. Now, bond buybacks are not a new thing. They've absolutely happened before under different administrations as well. I think that they were definitely doing it during the Biden administration as well. but during previous times, they've at least said it was more of a liquidity and cash management thing. This is like, they're directly trying to change the yield curve. Bessett has said it. He's like basically trying to manipulate the market and the yield curve. And I think what's really amazing here is the market just doesn't care, right? Like they've done this a couple of times now.

20:03Like the first time he came out and announced it, it kind of worked on that announcement day, 10-year yields fell six basis points, so 0.06%. That's six basis points, right? Cool. 30-year drop, nine basis points. Those are meaningful drops, but not changing anything. But then it just went back up. So then Bessett came out and said, actually, we're going to do even more bond buybacks. And that announcement, the dip, it dipped a little bit for like 48 hours, And then it just came back and actually went higher from where they were before the announcement, erasing the entire sort of relief rally that it created.

20:46Then Besson responded by signaling he'd go even bigger. And on September 9th, came out and said, I am the house. He literally said, I am the house now. Like, you know, they say, don't bet against the house. I am the house. You can bet against me if you want. They announced a$6 billion long-end buyback. Well, not enough, right? $6 billion? Sounds like a lot. Not against$40 trillion in debt, right? It didn't even matter. The opposite effect, bonds tanked. Bond prices and bond yields move inversely. So like when bonds are being sold for cheaper, when their prices go down, yields go up. So basically, bonds tanked.

21:29prices went down on bonds and yields went up. And we actually just saw the 10-year hit a new long-term high after that third announcement, right? So the bond market said to Scott Besson, challenge accepted, right? We don't care about your buyback. So just think about what we just watched, right? The most powerful financial officer in the United States stood up, told the market he was gonna push long-term rates down, dared traders to fight him, and they fought them and won and rates went up. That is the bond market telling Washington pretty firmly that a few billion dollars of buybacks do not solve a$40 trillion problem.

22:14$40 trillion, by the way, is$40 ,000 billion. So$6 billion versus$40 ,000 billion, probably not enough. The other thing is, I just don't think the bond market wants to be manipulated in this way because the reason it's going up is for all these structural issues, right? The deficit and inflation. And by Besson going out there and sort of saying, well, we're going to buy back these bonds, it shows they're not trying to address these issues. They're not trying to fix inflation. The war isn't ending. Tariffs aren't stopping. The deficit is not being closed. They're signaling They're not going to start buying this debt because Scott Besson went out and said we're going to do bond buybacks.

22:59They want real structural fixes to go in place. So pretty crazy. People say bonds are boring. For me, this has been an exciting couple of days because a lot has been going on. All right, guys, we got more on the bond market and what you should be doing in your own portfolio, but we got to take a quick break. We'll be right back. I just booked a trip to the coast and I cannot stop thinking about it. waking up early, walking somewhere I've never been, finding a little cafe with no plan except to see what the day brings. A few days to explore, try new restaurants, smell the salt and citrus in the air, and remember why we love to travel in the first place.

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