Hopes for lower mortgage rates may not be realized

Even as home prices continue to go up and mortgage rates stay relatively high in the context of the last decade or so, young people still want to get married and start families. As it turns out, some forces of nature are powerful enough to usurp even economics.

Which is why I have a number of young Gen Z families in my life who would really like to buy a home and have been waiting patiently for the Fed to continue the interest rate easing cycle which started in August of 2024. The announcement last week of the Fed reducing its short-term interest rate target policy was very welcome news.

While the Fed started to reduce interest rates last year, the central bank paused in early 2025, claiming to do so in reaction to policy uncertainty with the new administration. After a couple weak monthly employment reports over the past quarter, and a bit of unorthodox "encouragement" from Donald Trump, the rate cuts have restarted, and Fed guidance is indicating the rate cutting cycle is likely to continue through the end of the year.

For youngsters in the market for a home, this all seems like good news. Unfortunately, I'm afraid I'm about to rain on their parade.

In theory, lower short-term interest rates would have the effect of lowering rates on home mortgages, but the non-theoretical world works a bit differently. While Fed fund rates can have some indirect influence on mortgage rates, the pricing of home mortgages has been determined to be much more closely correlated to the yield on the benchmark 10-year U.S. Treasury bond. After the Fed cut short-term rates, the yield on the 10-year U.S. Treasury bond actually moved higher by a small but meaningful amount, which begs the question of why, and what this could mean for borrowers and other asset classes.

The 10-year U.S. Treasury yield is the benchmark for bond investors. I have referred to this indicator as the "Dow" of the bond market, and most professional investors check this rate as routinely as they check the stock market. The "10-year" is mission critical to many types of investment decision making.

The factors influencing the 10-year yield are much broader than simply tracking the Fed's short-term interest rate policy. Prospects for future economic growth, political concerns, geopolitical risks, anticipated government borrowing, stock market volatility, and perhaps more than anything, the expectations for inflation over time all come together in a complicated amalgamation to price the yield on this high-profile security. In my experience, the 10-year doesn't always behave as expected, and can certainly be prone to short-term dislocations.

Bond yields move higher when bond prices move lower. When the yield on the 10-year moved higher, it was logically the result of investors selling these U.S. Treasury securities and moving their capital to other asset classes. After the Fed rate cut, investors appeared to move out of haven assets like U.S. Treasuries and into more aggressive asset classes such as stocks. This can be seen by the behavior of the stock market (S&P 500 index) during the same time period, which hit multiple new highs over the past week. This makes sense -- lower short-term rates typically result in some near-term strength in stock prices.

There may be more to this story though. Lower short-term rates have a direct impact on the cost of U.S. government borrowing, and the Federal government still needs to borrow nearly $600 billion by the end of the year. I postulate the Fed rate cut further opens the door to accelerated government borrowing which may have the effect of reigniting inflation in the economy. When bond investors anticipate higher inflation, they understandably demand higher bond yields to offset the loss of purchasing power.

I think it's clear at this point that the Federal government will need to seek lower interest rates and higher inflation in its pursuit to manage its colossal debt load. With the Federal Reserve re-accelerating the pace of rate cuts before inflation returned to its 2% target level, investors are expecting inflation to once again start trending higher and are positioning accordingly -- into real and financial assets with more potential for appreciation, while at the same time demanding higher yields.

So, for the time being, our beleaguered Gen Z home buyers may just have to accept higher yields on mortgages, but may make up for it over time by owning the home itself, which is typically the largest asset most American families will own.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.