How Do Mortgage Rates Work? The 10 Year Treasury Decides

Aug 20, 2026 · Mortgage rates explained · 8:00 video

By a former derivatives trader with 10 years experience at three of the world's largest investment banks.

The full breakdown runs 8:00. The written version below covers the 4-step machine.

How do mortgage rates work? Not the way you were told. The Federal Reserve has held rates flat for 231 days and the 30-year fixed mortgage still went from 5.98% to 6.67%. The Fed does not set your mortgage rate. The bond market does, and there is one number you can check yourself in 10 seconds.

The 4-step machine

• Step 1: You are not safer than the US Treasury. Every loan in America is priced as a markup over the government's own borrowing rate, and for a 30-year mortgage the benchmark is the 10-year Treasury yield.
• Step 2: Your bank sells your loan within weeks. The rate you get is set by what the buyer of your loan will pay, not by your bank's generosity.
• Step 3: Your loan becomes a bond. Pooled into a mortgage-backed security, your payment stream competes directly with Treasuries for the same investors. On a $400,000 loan, the gap between the two rates is about $180 a month.
• Step 4: The risk is you pay them back too early. Prepayment risk is why the spread exists at all: when rates fall, everyone refinances, and the bond investor gets their money back exactly when they least want it.

The one number

6.67% minus 4.70% is 1.97 points. That spread is the only part of your mortgage rate that is actually about mortgages. Everything underneath it is just the bond market. Check the 10-year Treasury yield, add roughly 2 points, and you have priced next Thursday's Freddie Mac headline before it prints.

The 2-year Treasury, the market's forecast of Fed policy, currently says the next move is priced higher, not lower. And a Fed cut does not automatically lower your mortgage rate; 2024 already proved that when the Fed cut and mortgage rates rose. What would actually bring mortgage rates down is a lower 10-year yield or a narrower spread, which is exactly why the long end matters: see 30 Year Treasury Yield: The $4 Billion Buyback That Failed. What sustained high rates do to a lender's book is in UWM Stock Crash: 2026 Mortgage Crisis Explained.

Sources: Freddie Mac Primary Mortgage Market Survey (August 13, 2026), US Treasury daily par yield curve, FRED series MORTGAGE30US and DGS10, and BLS CPI. All figures as reported.