Why is the 10 year treasury record used as a benchmark for determining mortgage rates?
Answers:
Mortgages are bundled together by mortgage companies and sold on the open out open market as mortgage back securities. Say $10M of 30 year loans at 7.00%. These securities are sold to investment companies (insurance companies, investors, bank, pensions).
Ten year bonds are also sold to investors on the widen bazaar and are considered a rock solid almost guaranteed investment. Mortgage back securities are considered complex risk (since mortgages in the bundle could be refinanced or default (foreclosures)).
SO when pricing mortgage securities, traders will look at the price and relinquish of treasury bonds and determine what they're inclined to invest. If T-bonds are giving way 8% next mortgage securities are going to be greater than 8% otherwise, why buy them? If I can gain T-bonds for a better return why hold the risk? Conversley, if T-bond give up 4% the interest required to trade mortgages on the widen flea market go down near it. Other factor determine mortgage rates also, but T-bonds are their focal competition for investor dollars.
Mortgage rates used to be tied to the 30 year treasury bonds but they discontinued those and so they begin using the 10 year treasury report because it is the longest treasury details occupancy.
The mortgage information may be written for 30 years, but the average character moves and pays bad their mortgage surrounded by 7-10 years. This make the 10 year treasury the nearest risk-free benchmark.