Where is the 10
Where is the 10-year Treasury Going to Be in Five Years?
If you’re not in the mortgage business, a financial advisor or a portfolio manager, you most likely don’t pay much attention to the 10-year Treasury Note. But this index, along with other securities is followed daily to get an idea on where mortgage rates are and where they might be headed. Note, no one can accurately predict where rates will be five years from now but recent trends can provide some guidance in the near term. But why is that important?
When investors review their asset allocation it’s typically a situation of how much money to put into stocks and how much into bonds. Typically, the longer it is to retirement, more money will be allocated to stocks. Stocks can provide greater returns but they do carry risk. A publicly traded stock performs as the company performs. If a company is doing well and paying dividends then investors will buy stock in that company to reap the benefits. On the other hand, if a company misses its quarterly goals or loses money the price of the stock will fall. If a company gets into too much financial trouble it can go bankrupt, making the stock worthless.
Bonds on the other hand do not carry such risk. When an investor buys a bond the investor knows what the yield will be upon maturity. Yet the yields from bonds are low compared to a performing stock. Investors buy bonds not to rake in the profits to but to shield their investments from losses. When the economy is booming, investors flock to stocks and mutual funds. When the economy is the opposite, investors retreat from stocks and place their funds into the safety of bonds. When the demand for bonds increases, the price of the bond goes up causing the yield to fall. So what’s the connection with the 10-year Treasury?
Mortgage rates are set each day associated with a specific mortgage bond, or mortgage-backed security. For example, a conventional 30 year fixed rate is tied to what is referred to as the FNMA 30yr 3.0 mortgage bond. When the economy is doing well, investors sell bonds causing rates to rise. Yet the consumer typically doesn’t have access to such pricing or knows where to get it but because the maturity of the 10-year Treasury is very similar to the term of an existing mortgage, anywhere from seven to 10 years, they’re similar in nature.
What about five years from now? We can pull out our crystal ball but it’s going to be a little fuzzy. If the economy continues to gradually improve or at least stay within a relatively tight range, we can expect interest rates to be very near where they are today. The Federal Reserve has indicated there could be one or two more rate increases before the end of the year but the increase will likely be a 0.25% bump. If this sort of measured balance continues, seeing a 30 year fixed rate five years from now in the low 4.00% range wouldn’t be a surprise.